Corporate due diligence requirements pursuant to the Supply Chain Act
The aim of the Act and its scope of application
Basic human rights violations are being repeatedly committed within global supply chains; these can involve child labour, exploitation, discrimination as well as inadequate workers’ rights and also include environmental destruction. Germany is the third largest importer and so German companies benefit particularly from foreign production and trading operations. The Supply Chain Act aims to require companies to meet their global responsibility in relation to protecting people and the environment.
The Supply Chain Act will apply to domestic (German) companies that ordinarily employ at least 3,000 workers worldwide (as of 2024 at least 1,000 workers). The Supply Chain Act will not be directly applicable to companies with fewer employees. Nonetheless, for internal company reasons or, e.g., because of the expectations of customers and/or other reference groups an analogous applica-tion could come about.
Which human rights does the Supply Chain Act relate to?
The due diligence requirements are linked particularly to human rights risks. The international treaties that have been ratified by Germany constitute an initial reference point for the human rights that are covered by the Act. The draft legislation supplements these with a catalogue of prohibitions pertaining to human rights and environmental obligations. The following areas, among others, are covered:
- freedom from child labour, forced labour, slavery and torture,
- freedom of association,
- prohibition of breaching current occupational health and safety obligations that are applicable under national law,
- integrity of life and health,
- prohibition of unequal treatment,
- prohibition of refusing to pay a decent wage and upholding the minimum wage,
- environmental protection and environment-related obligations,
- prohibition of unlawful deprivation of land, forests and waters.
Catalogue of requirements for German companies
The applicable human rights due diligence requirements for companies constitute the main subject matter of the Supply Chain Act. These include, in particular:
- setting up a risk management system
- risk analysis
- adoption of a policy statement
- preventative measures
- remedial measures
- setting up a complaints procedure
- documentation and reporting
The due diligence requirements basically span the entire supply chain. The requirements for the companies are graduated here, in particular, according to the degree of influence that they are able to exert. Utmost diligence is prescribed for a company’s own field of business. In the case of direct suppliers there are minimal exemptions to the requirements. In the case of indirect suppliers, the due diligence requirements would apply for a company once it has received substantiated reports of potential human rights violations at that level.
Please note: In cases of violations, appropriate fines and penalty payments can be imposed by the Federal Office for Economic Affairs and Export Control (Bundesamt für Wirtschaft und Ausfuhrkontrolle, BAFA), which is responsible for this. Furthermore, a violation could result in exclusion from public procurement procedures and civil lawsuits.
Outlook: Once the legislation has been passed, at the very latest, companies should give some detailed consideration to carrying out a risk analysis for their own field of business as well as for their direct suppliers. To this end, in Part II, in the next issue of the PKF newsletter, the respective implementation of a risk management system will be specified and we will take a closer look at the consequences in the case of violations.