How Germany’s New Supply Chain Act Will Affect Your Brand
Photo by Anamul Rezwan from Pexels
“All over the world, people and nature suffer from the irresponsible dealings of German companies.”
This harsh (but fair!) statement by the Initiative Lieferkettengesetz illustrates Germany’s ongoing inaction to legally regulate brands’ due diligence obligations along their supply chain. Until now, Germany has relied on companies’ voluntary obligation, unlike other European countries like the UK, France, and the Netherlands.
But things are about to change.
In March 2021, the German Cabinet approved the Supply Chain Act. With the so-called “Lieferkettengesetz” or “Sorgfaltspflichtgesetz” (i.e. Due Diligence Act) the legislator wants to create clear legal regulations for international supply chains for German brands.
So what exactly does the Lieferkettengesetz entail? When will it come into effect? Who exactly does it pertain to and how does this affect the need or necessity for transparency along your supply chain?
Read on to find out.
What Does Germany’s “Lieferkettengesetz” Entail?
In a nutshell: The new law specifies the form in which companies must fulfill their human rights due diligence obligations.
Violations include child labor, exploitation, discrimination, and lack of labor rights, and will result in sanctions and reputational damage. The draft also covers environmental protection, for cases where environmental risks might lead to human rights violations.
At the same time, the law will reduce competitive disadvantages for brands that already invest voluntarily in sustainable supply chain management.
The draft law is scheduled to be passed by the German Bundestag before the 2021 summer break and will then initially apply to companies with more than 3,000 employees, starting in 2023. From 2024 on, it will also apply to companies with more than 1,000 employees.
Protection of Human Rights
A range of issues make laws like this necessary. For example, more than 25 million people work as forced laborers worldwide, and over 75 million children are affected by child labor. All while Germany made over 1 billion euros from import business in 2018.
This is why the overarching protection of human rights in the global economy is at the heart of the Lieferkettengesetz, which will oblige German brands to better meet their global responsibilities.
Corporate Due Diligence
For the first time, the Supply Chain Act also provides clear requirements for corporate due diligence. Companies are responsible for analyzing human rights risks, taking preventive and remedial action, establishing grievance mechanisms, and reporting on their related activities (more details on that in just a few paragraphs).
The Federal Office of Economics and Export Control (BAFA) will review and control compliance with the law as an external authority. BAFA will be able to impose fines or exclude brands from public procurement in the event of failures or violations.
Negotiations are currently underway with the Federal Ministry of Justice on the amount of the mandatory and administrative fines. Fines of up to 10% of annual sales are a possibility.
How Germany’s Supply Chain Act Will Affect Your Brand
Companies that fall under the Supply Chain Act will be obligated to
Establish a risk management system
Define an in-house responsibility officer
Perform regular risk analyses
Adopt a policy statement
Establish preventive measures within the brand’s own business unit
Take corrective action when necessary
Establish a complaints procedure
Implement due diligence with regard to risks at indirect suppliers
Documentation and reporting
This will initially affect approximately 600 companies nationwide, starting with the first step in 2023, and almost 2,900 in the second step. Brands are thus given sufficient time to adjust to the new regulations, implement the above-mentioned systems and processes, and take a close look at their suppliers to ask questions like:
What are the working and safety conditions on site?
Is basic protection guaranteed for workers?
Are the respective country’s labor laws being maintained?
Supply Chain Laws, Documentation and Transparency
While the Supply Chain Act doesn’t oblige companies to expose the documentation of their measures to the public (in fact, it stipulates that the documentation shouldn’t be publicly accessible) it does illustrate the accelerating trend for improved supply chain transparency.
More and more consumers worldwide aren’t just actively seeking out ethically produced wares to buy - they’re asking for hard evidence of ethical practice, down to the farthest reaches of the supply chain.
Especially if you’re one of the affected brands, whether it’s your turn in 2023 or 2024, it’s a good idea to start figuring out how to make your supply chain as transparent as possible. Both in order for your brand to abide by the new Lieferkettengesetz as well as to offer your customers what they’re increasingly demanding. That’s just good business sense all around.
The easiest way to do this is with a platform like Bomler, which closes the gap between buyer expectations for supply chain transparency and your brand’s ability to prove it.
With Bomler, you’re able to
obtain transparency data from your suppliers,
keep track of it within your own organization, and
make your supply chain information available to your customers (and BAFA) when and where they ask for it.
Click here to register for the platform for free.