Insights on the German Supply Chain Due Diligence Act
The diversity, breadth and depth of legislation pertaining to environmental, social and governance (ESG) is growing and placing greater obligations on entities to report more comprehensively. The German Federal Council has enacted a new piece of legislation to focus on child labor, slavery, safety in the workplace, employment and wage discrimination, and environmental harm. Effective on January 1, 2023, German companies with more than 3,000 employees will be required to prevent or at least minimize human rights and environmental rights infringements in their supply chains.
On June 11th and 25th of 2021, the German Federal Council passed the Supply Chain Due Diligence Act (SCDDA). SCDDA's objective is to safeguard human rights and the environment in the global economy which means companies will need to adapt and update their compliance, purchasing and contract drafting processes.
SCDDA applies to companies that have their central administration, principal place of business, administrative headquarters, registered seat, or branch office in Germany and have 3,000 or more employees in Germany. Starting January 1, 2024, the number of employees will be reduced to 1,000. Employees that are posted abroad are included for domestic companies. Group companies are included in the calculation of the number of employees of the parent company, and temporary workers are only included in the calculation if the duration of the assignment exceeds six months.
Risks Related to Human Rights
A risk related to human rights is defined as a situation in which there is a sufficient degree of probability based on factual indications that a violation of one of the following prohibitions will occur:
-
Prohibition on employing a child of 15 years or younger.
-
Prohibition of the worst forms of child labour of children under 18 in accordance with the ILO Convention on Worst Forms of Child Labour, 1999 (No. 182).
-
Prohibition of forced labour.
-
Prohibition of all forms of slavery or similar practices of domination or oppression at work.
-
Prohibition on disregarding the local applicable rules on workplace safety and working conditions if this could lead to workplace accidents or work-related health risks.
-
Prohibition on disregarding freedom of association.
-
Prohibition of employment discrimination.
-
Prohibition of wage discrimination.
-
Prohibition on causing harmful changes to the soil, polluting water, polluting air, causing harmful noise emission, or over-consuming water, which severely impairs the natural resources necessary to preserve or produce food, denies access to drinking water, destroys or impedes access to hygiene facilities, or has harmful effects on human health.
-
Prohibition on those who acquire, develop, or otherwise use land, forest, or water from unlawfully evicting persons from or depriving them of the use of such land, forest, or water when those persons are dependent on the land, forest, or water for their livelihood.
-
Prohibition on commissioning or using private or public security forces to protect a business project if, due to a lack of control, the security forces will infringe the prohibition on torture, harm life or limb, or interfere with freedom of association and the right to collective bargaining.
-
Prohibition of an action or inaction that is directly capable of infringing a protected legal interest in a particularly serious manner and whose illegality is obvious, taking into account all circumstances.
Risks Related to the Environment
A risk related to the environment is defined as a situation in which there is a sufficient degree of probability based on factual indications that a violation of one of the following prohibitions will occur:
-
Ban on the manufacture of mercury-added products in accordance with article 4, paragraph 1 of the Minamata Convention.
-
Ban on the use of mercury or mercury compounds in manufacturing processes in accordance with article 5, paragraph 2 of the Minamata Convention after the phaseout date.
-
Ban on the handling of mercury waste contrary to the requirements of article 11, paragraph 3 of the Minamata Convention.
-
Ban on the production and use of chemicals according to article 3, paragraph 1, letter a of the Stockholm Convention on Persistent Organic Pollutions (POPs Convention).
-
Ban on the non-environmentally sound handling, collection, storage, and disposal of chemical waste contrary to the requirements of article 6, paragraph 1, letter d of the POPs Convention.
-
Ban on the export of hazardous wastes and other wastes according to article 1, paragraphs 1 and 2 of the Basel Convention to a state party that prohibits the import of such wastes, to an importing state that does not consent in writing to the specific import, to a non-state party, or to an importing state where the wastes will not be managed in an environmentally sound manner.
-
Ban on the export of hazardous wastes from states listed in annex VII of the Basel Convention to states not listed therein.
-
Ban on the import of hazardous wastes and other wastes from non-state parties of the Basel Convention.
Due Diligence Procedures
Companies within the scope of the act must set up each of the following due diligence procedures to safeguard human rights and the environment in their global supply chain:
-
Establish a risk management system.
-
Define internal responsibility for compliance with the risk management system—for example, by appointing a human rights ombudsperson.
-
Carry out regular risk analyses.
-
Adopt a policy statement on the company’s general human rights strategy.
-
Implement preventive measures in the company’s own business area, which includes the activities of subsidiaries, if the parent company exerts “decisive influence,” and vis-à-vis its direct suppliers.
-
Take remedial actions if a violation has already occurred or is imminent.
-
Set up an internal complaints procedure.
-
Establish due diligence procedures regarding risks associated with indirect suppliers that will be applied when the company has substantiated knowledge of a violation.
-
Document the company’s due diligence procedures, risks identified, and measures taken, and then publish a yearly report on its website, which must be free of charge and publicly available.
Sanctions and Legal Action
Companies that violate the act are not civilly liable. However, companies can be fined depending on the severity of the violation. Large companies with an annual global turnover or more than €400M can be required to pay fines of up to 2% of their annual global turnover. In addition, companies that have been fined a minimum of €175,000 can be excluded from public procurement for up to three years. When a person’s "legal interest of paramount importance" as listed in the annex to the SCDDA has been violated, that person may authorize a non-governmental agency or trade union to sue on his or her behalf. Such protected legal interests of paramount importance include life and limb.
How to Prepare
Breaking it down into manageable elements will probably make the most sense to identify priorities early. Any suppliers to a German owned entity are likely to have to satisfy the obligations imposed by the legislation so be prepared to have a dossier or file that addresses such aspects. This would be best served by creating a new standard report from your database in time to meet these obligations. Other countries are taking similar approaches along with those recently approved (November 2021) and pending Royal Assent such as the UK Environment Act, Section 54 of the Modern Day slavery Act 2015 (updated/revised).
On March 10, 2021, the European Parliament adopted its Report on Corporate Due Diligence and Accountability. This report provides a sense of the final shape of a future EU directive. Under the proposed text, companies would be required to carry out due diligence strategies to assess and address the risks related to the operations of their global supply chains. The covered risks are threefold:
-
Human rights (e.g. forced labour, worker safety)
-
Environment (e.g. ecosystem degradation, unsafe levels of hazardous products)
-
Good governance (e.g. bribery of public officials in international business transactions)
Accordingly, the interconnected nature of businesses and legislation means that procurement and supply chains are inextricably linked to every area of the business and will need to consider this as a strategic imperative.
Additional Read: Geopolitical Insights of Ukraine Russia Conflict on Supply Chains
Resources
The new Supply Chain Act (bundesregierung.de)
Deloitte-SCDDA-implementation-companies-EN.pdf
Environment Act 2021 - Parliamentary Bills - UK Parliament
