The EU is currently working on the EU-CSDDD (the draft of the Corporate Sustainability Due Diligence Directive), in which the number of companies will be reduced to 500 employees (as of 15.08.2023). I would therefore like to take this opportunity to summarise the facts of the Supply Chain Act once again.

To whom does the Supply Chain Due Diligence Act (LkSG) apply?

From 01.01.2023:

Companies with at least 3,000 employees in Germany that have their head office, administrative headquarters, or registered office in Germany or that have a branch office in Germany and generally employ at least 3,000 employees in this branch office.

From 01.01.2024:

Companies with at least 1,000 employees that have their head office, administrative headquarters, or registered office in the country or that operate a branch in the country and employ >/= 1,000 employees in this branch.

Group companies are included in the calculation of the number of employees of the parent company.

Temporary workers are only considered in the calculation if the period of employment exceeds 6 months.

If I have less than 1,000 employees, am I not affected at all?

You may be indirectly affected. The companies directly affected are obliged to enforce compliance with human rights in the supply chain. The measures necessary for this can have a direct impact on suppliers, for example through contract adjustments, new purchasing conditions, or for example a code of conduct.

What does the law require?

Affected companies must make reasonable efforts to ensure that there are no violations of human rights or environmental protection in their own business and in the supply chain. A distinction is made between the company’s own business and the supply chain, with direct and indirect suppliers.

Own business unit:

Includes every activity for the creation and exploitation of products and for the provision of services, regardless of whether it is provided at a location at home or abroad.

Supply chain:

A risk analysis shall be conducted for direct and known indirect suppliers. Preventive and remedial action must be taken whenever it receives substantiated knowledge of risks and possible violations or breaches of human rights and environmental obligations.

Overview of the Supply Chain Due Diligence Act (LkSG)

Human rights:

These arise from internationally recognised agreements, in particular the ILO core labour standards, to which reference is made in the Act. The law defines as human rights risks above all child and forced labour as well as slavery, disregard of labour protection obligations and freedom of association, unequal treatment and withholding of an adequate wage, certain environmental offences. The Supply Chain Act takes the environment into account about environmental damage that leads to human rights violations. Further, on the due diligence obligations of companies on environment-related obligations arising from the Minamata Convention (risks from involvement in the production and disposal of mercury-containing products) the PoPs Convention (risks from the production or use of certain persistent organic pollutants) and the Basel Convention (risks from the import and export of wastes).

Appropriate:

Appropriateness depends on the nature and scale of the business, the company’s ability to influence the immediate polluter, the severity of the breach, the reversibility of the breach, the likelihood of the breach occurring and the nature of the contribution to causation.

What do I need to do as a company?

Risk management and risk analysis:

Companies must introduce appropriate risk management or adapt their existing risk management accordingly. The risk analysis must examine whether there is a risk that their own business actions or business actions in the supply chain violate human and environmental rights.

Policy Statement:

Businesses must adopt a policy statement on their human rights strategy. This policy statement addresses the process for complying with human rights and environmental due diligence requirements in the supply chain, the specific risks and the company’s human rights and environmental expectations of its employees and suppliers.

Preventive and remedial measures:

Based on the results of the risk analysis or upon gaining knowledge otherwise, companies must take preventive and remedial measures and review their effectiveness. This applies, for example, to supplier selection and monitoring processes, implementing a code of conduct, conducting training and verifying the Situation through on-site audits of suppliers.

Grievance procedure:

A low-threshold grievance procedure shall be implemented and publicised. Affected persons of any kind who have knowledge of possible violations can then submit reports. Companies must then investigate, and report to the whistleblower on progress.

Documentation and reporting requirements:

The measures, results and fulfilment of due diligence obligations must be documented by the companies. An annual report is to be submitted to BAFA.

How is compliance with the LkSG monitored and enforced?

Regulatory measures:

The law provides for far-reaching powers of intervention by the Federal Office of Economics and Export Control (BAFA). It can act based on a tip-off or ex officio and impose measures on the respective company. BAFA has far-reaching information and access rights for this purpose. An affected enterprise must support it in enforcing the measures.

Special litigation status:

Trade unions and non-governmental organisations (NGOs) can be granted authorisation by an affected party to take legal action, and thus litigation status can be achieved in Germany.

What are the penalties for violations?

Fines for violations of due diligence and reporting obligations of up to EUR 8 million depending on the type and severity of the violation. In the case of violations of the obligation to initiate remedial measures or to implement a corresponding remedial concept at a direct supplier, companies with an average annual turnover of more than EUR 400 million face a fine of up to 2% of the average annual turnover.

Exclusion from public tenders for up to three years.

The above information is a condensed summary. For more details or questions, please contact a specialised lawyer.