The Knock On Effect of Germany's Supply Chain Due Diligence Act

Mandatory Human Rights Due Diligence Requirements

On 1 January 2023, Germany’s groundbreaking legislation, the Supply Chain Due Diligence Act, came into effect. This new law has made it obligatory for companies with a workforce of at least 3,000 employees and with headquarters or offices in Germany to carry out comprehensive human rights due diligence concerning their own operations and current and potential suppliers. It's worth noting that this law applies not only to domestic companies but also to foreign companies with subsidiaries in Germany. The due diligence process encompasses crucial aspects such as forced labour, child labour, environmental impact, discrimination, unethical employment practices, and hazardous working conditions. According to the Federal Statistical Office, nearly 3,000 companies in Germany fulfil these criteria.

In addition to identifying and assessing the impact of third parties on human rights and the environment, companies are required to publish an annual report outlining their strategies for preventing and addressing any adverse effects. Failure to comply with these regulations can result in fines amounting to up to 2 percent of the company's average yearly global revenue or up to EUR 800,000, along with a temporary exclusion from applying for public contracts. Moreover, starting in 2024, the law will expand to include companies with a workforce of at least 1,000employees in Germany. A growing concern omitted in the law is the use of subcontractors and how to ensure their human rights and environmental compliance.

A Trend Towards Mandatory Compliance

Germany's Supply Chain Due Diligence Act is part of a larger global trend towards mandatory human rights and environmental due diligence. In November 2022, the European Union approved the Corporate Sustainability Due Diligence Directive (CSDDD), which mandates companies operating within EU member states to ensure compliance with human rights and environmental sustainability criteria, both within their own activities and those of their third-party partners. This directive is set to take effect on 1 June 2023. Prior to this, several EU countries, including the Netherlands, with the Child Labour Due Diligence Act of 2019, and France, with the Duty of Vigilance Law of 2017, had already implemented human rights and environmental due diligence requirements. However, Germany's Supply Chain Due Diligence Act stands out as the most comprehensive legislation in this regard. A French-based IT client account executive told us, ‘a significant number of our publicly listed clients are increasingly focused on environmental sustainability and expect our products to align with this goal’.

On 1 June 2023, the European Parliament adopted amendments to the CSDDD which has expanded the categories of covered entities and the inclusion of the financial sector. The new legislation aims at integrating the UN Guiding Principles on Business andHuman Rights. EU companies of substantial size and economic power (500+employees and EUR 150 million + turnover), EU companies operating in high impact sectors (250+ employees and EUR 40 million + turnover), as well as non-EU companies active in the EU, are required to prevent human rights and environmental abuses along their full value chains by carrying out due diligence. Following the adoption of the proposal, negotiations with the EU council and member states will begin. Soon, all EU member states will need to adapt or adopt laws similar to Germany's Supply Chain Due Diligence Act, following the implementation of the CSDDD. The CFO of a French online retailer told us that small companies have been actively implementing internal and external ESG processes over the past five years. An HR executive underscored that the emphasis on ESG has been driven not only by a growing concern among clients but also by the internal workforce, further amplifying its significance.

This shift is a response to the growing concerns of consumers, employees, and investors, who have become increasingly focused on a company's environmental, social, and governance (ESG) actions.

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