The Supply Chain Law in Five Minutes

Who does it apply to and what does it really mean?
14. June 2021 By Carolin Friedrich

The German government passed the Supply Chain Act on June 11, 2021. It aims to force big German companies to fulfill their due diligence obligations in supply chains. The idea is to improve the protection of human rights in global supply chains, and to ensure that businesses see to it that basic human rights – such as the prohibition of child and forced labor – are upheld, along with environmental standards.

Which Businesses Are Affected?

Companies based or operating in Germany with a workforce of more than 3,000 people will be required to comply from 2023 onwards. The law will be extended beginning in 2024 to cover companies with 1,000 employees or more. This means that from 2024, around 2,900 companies based in Germany, and others with branches here, will be affected.

What Does the Act Actually Mean for Companies in Practice?

The Act formulates requirements pertaining to responsible management of global corporate supply chains. Businesses will be required to fulfill the core elements of due diligence on human rights in order to fulfill their responsibility in the supply chain.

  1. Policy Statement: Businesses will have to publish a policy statement and have it approved by their management. This policy statement should set out the company’s human rights strategy and describe the procedures it uses to fulfill its due diligence obligations on human rights. It must also explain any risks identified in a risk analysis, and state what it expects of its employees and suppliers in the supply chain with regard to human rights.
  2. Risk management and analysis: Businesses must introduce appropriate risk management and implement it effectively. To do this, they have to produce an annual risk analysis in which they determine risks in their own area of business, and risks at their direct suppliers for which the business itself is partially responsible. They must also define responsibilities inside the company, including appointing a human rights officer and informing management about his or her work at least once a year.
  3. Preventative and remedial measures: If risks are identified in a company’s own business or in connection with direct contractual partners, preventative steps have to be taken to minimize and guard against these risks. If the company identifies human rights abuses in its own business or its supply chain, it must take appropriate remedial action to prevent, end, or minimize them.
  4. Documentation and reporting duty: Companies are required to prepare an annual report which details the fulfillment of their due diligence obligations in the previous financial year. The responsible authority checks that the report has been produced and the requirements have been fulfilled; if they have not, it can oblige the company to rectify the report within a reasonable period.
  5. Complaints procedure: Businesses must establish internal complaints procedures, but they are also given the option of participating in external ones. They have to ensure that anyone affected by the economic activity of the company or its supply chain has access to these procedures.

How Far Does It Reach Along the Supply Chain?

Until now, the core elements of this have only applied to direct suppliers – which means direct business partners, and therefore only the first stage of the supply chain. But if a company finds out about abuses at indirect suppliers further along the supply chain, it has to act there as well, conduct a risk analysis, and set up appropriate preventative measures.

Can Businesses Be Held Accountable?

The law does not make businesses liable under civil law or obliged to compensate victims of human rights abuses. But companies that fail to meet their due diligence obligations face fines of up to 2 percent of their sales. Furthermore, non-governmental organizations and trade unions will be able to represent victims in court if standards have been broken in supply chains.

What Is the EU Planning?

The European Union (EU) has its own concept that goes much further than the German law. In June 2021, the EU Commission will present a legislative proposal around due diligence requirements for the protection of human rights and the environment in supply chains. It envisages that companies will be obliged not only to protect human rights, but also to observe environmental concerns and avoid corruption. It aims to encompass both large and small businesses that are listed on the stock exchange, or whose business activities are associated with particular human rights risks. Under certain circumstances, companies could also be made liable under civil law, which means people affected by human rights abuses along the supply chain will have a chance of being compensated.

Stakeholder Reporting Supports Your Business

Are you ready for the forthcoming German Supply Chain Act? We will gladly help you meet its requirements. We offer a pragmatic approach to analyzing the extent to which due diligence is present in your company. This includes clearly prioritizing risk issues in the supply chain and identifying areas where action is needed.