Since January 1, 2023, the Supply Chain Act has been in effect in Germany, also known as Lieferkettengesetz. What exactly does this law mean and how can companies adhere to it? In this article, we aim to provide you with a straightforward explanation of the content and implementation of the Supply Chain Act.
What is the Supply Chain Act?
The Supply Chain Act (Lieferkettengesetz or abbreviated as LkSG) is a legal regulation aimed at obligating companies to adhere to human rights and environmental standards along their supply chains. It was established to minimise human rights violations and environmental damage that frequently occur in global supply chains.
The ‘Act on Corporate Due Diligence in Supply Chains‘ was passed by the Bundestag on July 16, 2021. The German version of the law is also based on European guidelines (Directive on Corporate Social Responsibility). Beyond the German Supply Chain Act, the EU is also working on a Europe-wide supply chain law. According to its current draft version, this law will go far beyond the requirements of the German law.
What are the goals of the Supply Chain Act?
The main objective of the Supply Chain Act is to protect human rights and the environment in globalised supply chains. Companies are expected to ensure that there are no human rights violations and environmental damages within their supply chains. The law aims to enhance the sustainability and social responsibility of businesses and promote the protection of individuals in production countries, as well as the reduction of environmental impact.
Who has to adhere to the Supply Chain Act?
The Supply Chain Act applies to all companies with more than 3,000 employees that are based in Germany or have a branch in Germany. Starting from January 1, 2024, it will also apply to companies with more than 1,000 employees.
What do organisations have to achieve to comply with the Supply Chain Act?
Companies subject to the Supply Chain Act must take specific steps to fulfill the requirements. These include:
- The implementation of a risk management system to identify and prevent human rights violations and environmental damages within their supply chains.
- The establishment of a complaint procedure through which affected parties can reach out to the companies.
- The regular (at least annual) documentation and publication of due diligence measures carried out by the company in the supply chain.
Behind each of these points are numerous, sometimes complex individual measures to facilitate risk management, grievance mechanisms, and documentation. If companies fail to fulfill their legal obligations, they may face significant fines (up to 8 million euros or 2% of revenue, depending on the company size).
Responsible for monitoring the new Supply Chain Act is the new Borna branch of the Federal Office for Economic Affairs and Export Control (BAFA).
What are the benefits of the Supply Chain Act for companies?
From a societal standpoint, the benefits of the Supply Chain Act are evident. In the best-case scenario, the law can contribute to reducing human rights violations and environmental pollution through stricter supply chain monitoring.
But there are also various advantages for companies themselves through the implementation of the Supply Chain Act.
It aids in improving reputation and strengthening trust among customers and business partners. Furthermore, it can lower costs by avoiding risks and assist companies in entering new markets by demonstrating their sustainability and social responsibility.
What are the challenges of the Supply Chain Act for companies?
The Supply Chain Act also brings certain challenges. For companies, there might be associated costs as they need to establish a risk management system and implement measures for preventing and responding to human rights violations and environmental damages. The complexity of the law and uncertainty about its implementation pose further challenges. Some companies and industry associations have also expressed concerns, fearing high costs, complexity, potential distortions of competition, as well as liability risks and legal uncertainties.
Case Examples: when does the Supply Chain Act apply?
To illustrate the relevance of the Supply Chain Act, we would like to present some specific use cases:
- Child Labor: A chocolate manufacturer in Germany sources cocoa beans from Ghana. Through an anonymous complaint, the manufacturer discovers that some cocoa plantations in Ghana employ children under the age of 15 as harvesters. The manufacturer urges its supplier to cease child labor and advocates for improving working conditions on the plantations.
- Forced Labor: A clothing manufacturer in Germany imports garments from Bangladesh. Based on research by a non-governmental organisation, the manufacturer realises that certain clothing factories in Bangladesh use forced labor. Workers are subjected to long working hours, denied minimum wages, and face threats from their employers. The manufacturer demands its supplier to end forced labor and works towards improving conditions in the factories.
- Discrimination: An electronics manufacturer in Germany sources electronic components from China. During a supplier survey, the manufacturer discovers that some electronics factories in China discriminate against women and individuals with disabilities. Women are paid less than men, and people with disabilities are not hired. The manufacturer urges its supplier to cease discrimination and advocates for equal treatment of all employees.
- Health and Safety: An automobile manufacturer in Germany imports car parts from Mexico. During an inspection by the quality team, the manufacturer identifies unsafe working conditions in some car parts factories in Mexico. The factories lack adequate ventilation, safety measures, and employee training. The manufacturer calls on its supplier to improve working conditions and prioritise employee safety.
- Environmental Protection: A chemical company in Germany produces chemicals. Through a supplier survey, the company realises that its supplier sources petroleum products from Nigeria. Petroleum production in Nigeria is environmentally damaging. The company urges its supplier to find more environmentally friendly sources of petroleum products.
- Raw Materials: An automobile manufacturer in Germany imports rare earth elements from China. During a supplier survey, the manufacturer discovers that rare earth elements are mined under poor working conditions in Chinese mines. Miners are subjected to long working hours, inadequate pay, and hazardous environments. The manufacturer asks its supplier to improve working conditions in the mines and advocates for upholding human rights.
How supplier surveys contribute to transparency in the supply chain
As the case examples have also demonstrated, supplier surveys are a crucial step toward transparency in the supply chain and compliance with the Supply Chain Act.
Through these surveys, companies can inquire about critical aspects of the law, such as risks, utilized raw materials, and global supply relationships. They aid in identifying areas of risk and documenting supplier relationships.
An online survey tool like Netigate is well-suited for conducting such surveys and also facilitates easy analysis of responses. Netigate fully complies with European security and data protection regulations. The Netigate survey tool can be used for one-time, regular, and event-specific supplier surveys (try Netigate for free here).
Conclusion: proper implementation of the Supply Chain Act
The Supply Chain Act is a significant step toward greater sustainability and transparency in the supply chain. When implemented correctly, it can lead to numerous benefits for companies as well. However, there are still many uncertainties regarding the specific details of risk identification and documentation requirements. Professional supplier surveys play a crucial role in simplifying the implementation of the new law and providing every company with enhanced transparency in the supply chain.