The German Parliament (“Bundestag”) adopted the “Act on Corporate Due Diligence in Supply Chains” (Supply Chain Due Diligence Act – “Act” or “LkSG”), and the act will enter into force on 1 January 2023. Originally adopted on 11 June last year, 2021, the act aims to improve the protection of the environment and international human rights by setting binding standards for large companies and their value chains.
Following the 2011 UN Guiding Principles on Business and Human Rights (UNGPs), Germany adopted a National Action Plan on Business and Human Rights, which recalled (but without setting legal standards) that companies should respect human rights in their operations, their value chains, and it is a well-known fact that most human rights violations occur at the beginning of the supply chain. But, and unsurprisingly, ten years after the adoption of the UNGPs, according to a study commissioned by the government:
- only 13-17% of German companies were considered to be “in compliance” with their obligations
- while 83-87% were not, and
- less than 1% were classified as “companies with an implementation plan” concerning these obligations.
As part of the fight against human rights violations and environmental degradation, the LkSG act notably aims to protect people from modern slavery, forced labour, human trafficking, hazardous work and exploitation under the standards of the International Labour Organisation (ILO) and the relevant articles of the International Covenant on Economic, Social and Cultural Rights (UN Social Covenant).
The LkSG act is the first in Germany to establish binding standards for companies concerning human rights and the environment. This is a huge milestone as it marks a shift away from the voluntary standards and self-regulation principles.
Who is affected?
- From 1 January 2023 onwards: All companies with at least 3,000 employees that have their head office, administrative seat or statutory seat in Germany OR companies that have a branch in Germany and usually employ at least 3,000 employees in this branch;
- From 1 January 2024 onwards: All companies with at least 1,000 employees that have their head office, administrative seat or statutory seat in Germany OR companies that have a branch in Germany and usually employ at least 1,000 employees in this branch.
Even if companies with fewer employees are not addressees of the LkSG Act, they may still be indirectly affected; therefore, due diligence obligations could still apply. This is because the companies directly affected would be obliged to enforce compliance to the best of their ability with human rights in their supply chain. The measures necessary for this can have a direct impact on their suppliers, for example, through the implementation of a code of conduct. In addition, the directly affected companies will often be dependent on the active support of their suppliers and thus have this support be contractually assured, e.g. in the form of reporting obligations as part of their risk analysis.
New risk management and reporting duties for businesses
With newly imposed due diligence obligations on environmental protection and on human rights, businesses must introduce iterative and ongoing, or in certain circumstances ad hoc, due diligence processes specified by the LkSG.
Identification and management of an organisation’s supply chain and the risks that come with it require the implementation of due diligence processes. The term “supply chain” refers to all products/services of a business, including all manufacturing and services, in Germany and/or abroad, from the extraction of raw materials to their delivery to the end customer. Furthermore, due diligence processes should implement the following criteria:
- type and scope of the business activities of the company subject to the due diligence obligations,
- the ability of the company subject to the due diligence obligations to exert influence (so-called leverage),
- typically expected severity of the violation, and
- type of contribution by the company subject to the due diligence obligations to cause a violation.
Who is CRI® Group?
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