After wrestling with it for a long time, the Federal Parliament has finally passed the act on entrepreneurial due diligence obligations in supply chains (Lieferkettensorgfaltspflichtengesetz LkSG = Supply Chain Due Diligence Act).
It can now finally take effect as per the beginning of 2023. Initially, the new statutory provisions require large companies to comply with their duty to exercise human rights and environmental due diligence within their supply chains – with medium-sized companies to be included a year later. Violations can be costly. Managers feel they are being pressurized into taking action. What is now important is that the requirements of the Supply Chain Act are integrated into existing compliance management (CMS) and other management systems.
A burden or a help?
Although some companies and industries see the LkSG as a step in the right direction, others are warning that this will be an additional burden. An EU supply chain guideline covering corporate due diligence and accountability could result in unified conditions of competition – at least within Europe. The EU Commission is already working on a respective draft. However, this might also make requirements that go beyond those contained in the LkSG mandatory. Whatever happens: The plan is to quickly adapt the German Due Diligence Act to any respective European regulation.
Cross-border corporate social responsibility
The minimum requirements that apply to companies are the human rights firmly embedded in the Universal Declaration of Human Rights (1948) , the International Covenant on Civil and Political Rights, resp. the International Covenant on Economic, Social and Cultural Rights (1966) , as well as the International Labor Organization’s Declaration on Fundamental Principles and Rights at Work and its Follow-up (1998) . This involves not only civil, political, economic, social and cultural rights, but also core working standards, such as the elimination of all forms of forced and compulsory labor and the effective abolition of child labor. Furthermore, the UN Guiding Principles also point out that companies are required to observe additional standards aimed at protecting indigenous peoples, women, national, religious, linguistic and ethnic minorities, children and the disabled, as well as migrant laborers and their families.
The OECD Guidelines for Multinational Enterprises are recommendations to companies operating in or from the member states. Although the principles, requirement profiles and benchmarks contained therein claim to be valid the world over, they are not legally binding. Nevertheless, the governments have explicitly undertaken a commitment to promote these OECD guidelines.
Companies are responsible for respecting human rights regardless of the ability or willingness of the states to protect these human rights. If the situation in a particular country prevents companies from fully complying with their obligations, they must respect the human rights principles to the extent possible given the circumstances.
What the Act primarily aims to achieve
The LkSG establishes requirements pertaining to responsible supply chain management. Companies based in Germany are required to comply with a legal framework that, from the legislator’s perspective, is both reasonable and acceptable. The LkSG installs a regulatory control and enforcement mechanism, designates the responsible authority and endows this with wide-ranging powers of intervention. Although it establishes a duty to endeavor to comply, it does not establish a duty to succeed or a liability guarantee.
The implementation of the core elements of human rights due diligence is intended to strengthen the rights of those affected by economic activity. At the same time, according to the explanatory statement pertaining to the draft law, the LkSG also accommodates the legitimate interests of the companies as far as legal certainty and fair conditions of competition are concerned.
Which companies are affected?
When the LkSG comes into force on January 1, 2023, it will apply to all legal company entities
- with headquarters, a main branch, an administrative center or a statutory office in Germany that
- “as a general rule” employs at least 3,000 members of staff.
- Branches of foreign companies which are of the same size are also affected.
- As of January 1, 2024, this will also include companies with 1,000 or more employees.
With respect to the above, the LkSG defines the term “employee” very broadly. This also includes self-employed persons who deliver to the company, informally employed persons, as well as illicit workers and bogus self-employed persons. Employees posted abroad also count. Temporary workers are to be taken into account if they have been working for a company for more than six months. Seconded employees remain members of the company that has sent them out . Within a corporate group, the domestic employees of all companies belonging to the group are attributed to the parent company.
Until mid-2024, an evaluation will be carried out as to whether companies with fewer than 1,000 employees are also to be included (also in light of developments in the EU legislation). This will be based on company reports (Section 10, paragraph 2), data from the supervisory authority, and surveys amongst the companies and stakeholders.
What exactly does a supply chain incorporate?
A supply chain according to the Act (LkSG, Section 2, paragraph 5) incorporates all the steps which are required – both at home and abroad – to produce a product or provide a service. This also includes the utilization of services (e.g. transport, the interim storage of goods and all types of financial services), whereby the Act distinguishes between a company’s own area of business and those of its direct and indirect suppliers.
Risk management
According to Section 4 LkSG, companies are required to establish an appropriate and effective risk management system, respectively adapt their existing risk management system, to the LkSG. It must be embedded in all business processes which may influence risk mitigation, such as within the management board, the compliance department, or procurement division. Risk analysis and any preventative measures derived from this must be designed specifically for the supply chain – there are no standard solutions.
A risk management system is effective where the phases described therein complement each other and are duly completed so that it is sufficiently probable that the objective of this system can be attained: The objective is to ensure that risks to human rights and the environment are identified and the circumstances that have caused these accordingly dealt with.
The effectiveness of the risk management system must be reviewed and monitored internally. The management of the company must determine who is responsible for this. The management must then appoint a human rights officer or respective body and provide the necessary resources to allow appropriate monitoring activities to be conducted. However, the members of the top management team are not relieved of their responsibility merely by installing this body. They must inform themselves about the work of this monitoring body on a regular basis and at least once a year.
Risk analysis as an ongoing task
For risk management to be effective, the company needs to know what impact its business activities have on the people associated with its products or services. Conducting risk analysis (Section 5, paragraphs 2 to 4) serves to identify the risks to human rights and the environment within the scope of the company’s own business operations and those of its direct suppliers and to derive preventative and remedial measures based on this knowledge.
Creating a risk analysis and keeping this up to date is not a trivial task. The first step is to obtain as comprehensive an overview as possible of the respective procurement processes. The structures, processes and players involved on the part of the company’s direct suppliers as well as other important groups of people who are affected must be known. Risk mapping according to business area, location, product or country of origin is suitable for this purpose. The prevailing political and legal conditions and vulnerable groups of people must be included in the analysis. This will often prove impossible to achieve without pulling on external knowledge.
The methods of information gathering to be used are selected at the company’s discretion. Risks in the occupational health and safety area (e.g. fire protection and building security and measures to protect the employees), can be determined during an onsite inspection. Whether employee rights are being observed can be clarified in discussions with employee representatives/the trade unions. Residents, those that represent the interests of these residents and local experts can provide information on the impact of entrepreneurial activity on health and the options for utilizing water and land.
Risk analysis is not a one-time task, but an ongoing one. The LkSG requires this analysis to be reviewed and updated at least once a year and whenever the company anticipates a significant change in the risk situation within the supply chain. This might be the case where new products, projects or new business segments are introduced or, for example, as a result of developments in countries in which the company or its suppliers are operating. Knowledge gained from the complaints procedure (Section 8, paragraph 1) are also to be taken into account.
Key subject: procurement
Procurement plays a decisive role. The company should define which precautions are to be taken regarding the individual steps in the procurement process (including product developments, the placing of orders, purchasing and production lead times) in an internal corporate code of conduct. This includes the striving for transparency and knowledge of the supply chain.
Determining delivery times, purchase prices or the duration of contractual relationships may have an impact on whether it is possible to avoid a human rights risk on the part of a supplier – or whether this risk might even be intensified. This is why developing and implementing procurement strategies and purchasing practices that are in keeping with the Declaration on Fundamental Principles and the general human rights strategy is so very important. A strategy for selecting suppliers and a development strategy should also be in place, as well as measures to be taken in the event of a breach of the supplier code.
It makes sense to have a code of conduct in place that specifies the standards which apply to the employees, and which describes these in an understandable manner. General and advanced training sessions can ensure that the employees are familiar with, understand and correctly apply the human rights strategy and respective codes of conduct and guidelines. For example, purchasers should be trained so that they are able to apply these standards in their day-to-day working routine and individual work processes, and so that they can identify and address cases where the procurement process conflicts with the goal of minimizing human rights risks (e.g. how delivery times are designed).
Conclusion
Companies should already be expanding their compliance management systems to include sustainability and human rights aspects right now in order to have the new requirements covered. The standards, e.g. not only ISO 37001 but also ISO 14001 and 45001, are integrated and extremely effective tools for monitoring compliance with binding obligations in a systematic and structured fashion. Help can also be found in the UN Guiding Principles on Business and Human Rights and the National Action Plan. A general responsibility exists with respect to the entire supply chain, but the requirements are graded according to the respective degree of influence on the originator of the human rights violation and according to the different stages within the supply chain – and this is actually of advantage as far as the general economy is concerned.
The fact of the matter is that legislation is now playing an increasingly important role when it comes to driving the subject forward. In the area of sustainability, the transition is taking place gradually. Things are developing from “parallel worlds” and individual solutions to the systematic mapping and evaluation of the sustainability strategy and topics. The many voluntary regulations are being turned into verifiable, measurable and enforceable obligations.
(References: https://www.un.org/depts/german/menschenrechte/aemr.pdf; https://www.institut-fuer-menschenrechte.de/fileadmin/Redaktion/PDF/DB_Menschenrechtsschutz/ICESCR/ICESCR_Pakt.pdf; https://www.ilo.org/wcmsp5/groups/public/—europe/—ro-geneva/—ilo-berlin/documents/normativeinstrument/wcms_193727.pdf; “As a general rule” means that what counts is the manpower strength which defines the company in the long term. Temporary fluctuations should not affect whether a company is bound by due diligence requirements or not.; Section 14, paragraph 1, of the German Act on Temporary Agency Work; DIIR Audit Standard No. 2, page 7)
Sepinaz Kuska
Sepinaz Kuska has a degree in Environmental Science and has been working in the consulting field for over ten years. In her role as auditor, coach and lecturer, she advises organizations in all management system-related consulting areas. She is Head of Management Systems at TÜV Rheinland Consulting.
