THE GERMAN SUPPLY CHAIN DUE DILIGENCE ACT

CONSULTING BRIEF #1

The German Supply Chain Due Diligence Act came into effect on 1st January 2023. It is the first of its kind to require businesses to ensure both human rights and environmental protection are upheld and respected in their supply chains and operations. At STOP THE TRAFFIK, we believe this is the start of a growing trend of mandating stringent corporate environmental and human rights due diligence.

When the German Supply Chain Due Diligence Act came into effect in January, it marked a major step in mandating corporate action to protect human rights and the environment. It requires companies based in Germany (or those with a branch there), with over 3,000 employees – and from 2024, those with over 1,000 – to prevent and rectify environmental and human rights violations generated by their operations and direct suppliers worldwide.

What this legislation means is that German-based companies must now address risks such as forced labour, child labour and unethical employment practices within their supply chains. Due diligence obligations for companies include the establishment of a risk management system, a complaints procedure, and the adoption and communication of human rights policies. Companies covered by the scope of this Act who fail to comply face fines of up to 800,000 euros, up to 2% of their average annual global turnover, or even exclusion from public tenders for up to 3 years.

The Supply Chain Due Diligence Act is not a one-off event and will not be the only piece of legislation requiring companies to uphold their responsibilities to human rights and the environment.

In 2022, the European Commission presented a draft of its new EU Supply Chain Act which, if adopted, will be transposed into national law within two years. This Act would require companies operating in the EU, with 500 employees or more and a turnover of at least 150 million euros, to audit suppliers in their global supply chain.

The Act has even more stringent specifications for sectors in which the risks for the environment and human rights are known to be serious. For instance, companies with 250 or more employees and a turnover of 40 million euros in industries such as forestry, mining and agriculture must already meet the new requirements laid out in the Act (although there is a transitional period of two years).

This trend does not just pertain to Europe. In the US, legislation has been passed that permits businesses to subsidise their spending on ESG initiatives. There are tax incentives for example which encourage businesses to invest in clean energy sources. Canada is in the process of passing a law to tackle modern slavery and forced labour in supply chains, which will likely be implemented at the start of 2024.

STOP THE TRAFFIK recommends businesses begin to address any risks in their supply chain now, as we expect this legislative landscape to grow in the near future. The protection of human rights and the environment are no longer ‘nice to haves’ but are essential to remain competitive in years to come.

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