The German Supply Chain Due Diligence Act
Disruption and change across global supply chains continue to create a challenging environment for retailers. Companies must respond rapidly during crises, such as maintaining the flow of goods and upholding labour standards during COVID-related lockdowns, while also working to meet evolving legal requirements for business conduct. Since 2000, more than 30 countries have introduced legislation requiring businesses to report on sustainability – with some key laws being announced in Europe in 2021.
One such piece of legislation, which comes into effect in January 2023, is a new German law called the “Supply Chain Due Diligence Act”. This law introduces a requirement for large businesses operating in Germany to manage social and environmental issues in their supply chains.
Companies must show that they are carrying out activities to identify and address any negative impacts on people and the planet that they may have contributed to. Failing to comply could come at a significant cost, with the Act including fines of up to 2% of global turnover, and potential bans from companies accessing public contracts in Germany for up to three years.
While the legislation is a welcome step forward in creating a level playing field for sustainable business practices, understanding how to meet its requirements can be tricky for businesses. The right tools and information are critical to preparing effectively – something British businesses will be keen to do, with the German market worth over £46 billion in UK exports.
Helping to ensure your business is prepared
The next six months present an opportunity for businesses within this law’s scope to take active steps to prepare for it. Data is a key part of this preparation. It’s essential that a company has accurate information on their operations and supply chain to identify, assess, manage and report on sustainability-related issues and meet the Act’s requirements – helping the business make informed decisions, and save time and cost in the long term.
1. Check if your company falls under the scope of the Act
The Act applies to any company, including UK businesses, with over 3,000 employees in Germany. That includes employees of all subsidiaries and businesses belonging to a parent company who work in Germany, including employees working abroad, and temporary workers with contracts of over six months.
From 2024, the law will also apply to businesses with more than 1,000 employees in Germany.
2. Carry out risk and impact assessments on suppliers, focusing on specific issues
Many retail companies already assess their supply chains to identify social and environmental risks and impacts. These assessments are an important part of supply chain due diligence, and are required by the German Act. The Act lists specific issues that companies need to look out for and requires that companies look at both their own operations and entire supply chain – including producers of raw materials.
Environmental issues include the production and use of organic pollutants, how hazardous waste is handled, and how businesses use products that contain mercury. This is a particularly relevant concern for fashion retailers, with textile mills accounting for 20% of the world’s industrial water pollution.
Social issues include child and forced labour, inequality, discrimination, barriers to freedom of association, and health and safety. The Act also mentions wage theft and whether employers are meeting relevant wage laws, such as paying the minimum wage. These issues are based on international standards, such as the International Labour Organization’s list of core labour rights (the “fundamental conventions”).
Risks in supply chains change constantly, so companies should aim to conduct risk assessments at least once a year, to help maintain visibility. Technology provides powerful tools to support this, such as data-led solutions that use information on suppliers’ locations, operations and workforces to highlight social and environmental issues.
These tools enable a business to analyse and compare risks easily across a global supply chain. Sedex’s risk tool, for example, shows that the food manufacturing industry globally has a higher risk of hazardous working conditions compared with workplace discrimination[1].
Companies can also seek external support, such as working with a specialist consultant to help identify the issues they need to look at and develop a supply chain programme.
3. Start to carry out other due diligence activities
The Act also outlines other activities that businesses need to carry out to avoid or reduce negative impacts. Companies should make these activities part of their regular operations and report on them annually, including how effective they have been and what impacts they identified.
These activities include:
● Risk management: Having a system in place to evaluate and manage the social and environmental concerns that businesses identify in their risk and impact assessments.
● Preventative measures: Taking steps to prevent and reduce these risks. This could include embedding responsible procurement practices, training on labour rights for company staff, or monitoring suppliers to confirm that they also meet the requirements of all relevant laws.
● Grievance mechanisms: Providing an internal complaints system for all employees, including suppliers’ workers, where people can share feedback safely and confidentially. For example, a mobile app can capture anonymous feedback from employees all over the world. These grievance mechanisms should support people to report social and environmental issues or incidents linked to the actions of any business in a company’s supply chain, including indirect suppliers.
● Documenting, monitoring and evaluation: Recording all these due diligence activities and keeping records on file for at least seven years.
4. Prepare a due diligence report
The Act requires businesses to prepare an annual report showing how they manage social and environmental issues in their supply chains. This should cover issues identified, processes implemented, and activities undertaken in the previous financial year. It should also include how the business assessed the effectiveness of their activities and lessons learned.
Companies need to submit the report to the German Federal Office for Economic Affairs and Export Control (BAFA) within four months of their financial year-end and publish the report on their business website.
5. Monitor for additional requirements
With the German government yet to confirm all details of the Act, there are still some unknowns. For instance, it’s not yet clear whether businesses will have to explicitly state in their annual reports that they’ve considered a risk and concluded it’s not relevant to their supply chain.
It’s always a complex task to prepare for new legislation. But with Germany being a priority market for many UK retailers, it’s critical to stay ahead of this Act’s requirements, to maintain your business operations.
By collecting data on direct and indirect suppliers, harnessing the right tools to analyse this data, and building even more visibility of supply chains, businesses can be ready to meet the Act. The visibility they build brings businesses long-term benefits and is a crucial foundation of sustainable business operations for long-term success.
[1] Source: Sedex’s Radar risk tool, looking at country overall risk scores for “Manufacture of food products”
