Guest article by Dr. Alfred Wörner

In recent years, the term ESG (environment, social, and governance) has become increasingly important in all areas of business, in industry itself as well as for the reputation of companies at financial markets. ESG factors play an important role for companies that seek long-term success and sustainable growth and want to evaluate their risks and opportunities from an environmental and social perspective.

Companies that prioritise sustainability and incorporate ESG principles into their business strategy are more transparent, provide better working conditions, and are environmentally conscious. This enables them to gain a long-term competitive advantage by reducing risks, lowering costs, encouraging innovation, protecting the environment, and thus positively impacting society.

This trend towards greater emphasis on ESG standards is also increasingly being demanded by consumers, investors, and other stakeholders who favour sustainable products and services and advocate ethical business practises. Last but not least, compliance with ESG standards is an important criterion for many job applicants when choosing their employer.

While the public debate on ESG frequently focuses on “environment,” “social” is often viewed with caution and not taken as seriously. For example, the NAP (National Action Plan for Business and Human Rights), which was already adopted by the German government in 2016, showed that many companies were and are not willing to voluntarily align themselves with these standards and assume their responsibility for their supply chains. Given the fact that due to geopolitical implications industries are forced to diversify their supply chains, this responsibility is getting even more important.

The so-called “Supply Chain Due Diligence Act” is therefore an important and necessary step to make companies aware of their social responsibility along the entire global supply chain.  The goal of this law is to make sure that companies comply with ESG standards and that human rights, worker rights, and environmental protection are taken into account and respected throughout the supply chain.

By implementing and complying with the Supply Chain Due Diligence Act as an essential part of ESG efforts, companies can position themselves as sustainable enterprises in their sales markets, benefit from a better reputation and thus secure higher competitiveness in the long term.

These attitudes and efforts, which are generally supported by a large majority, are now being translated into a regulatory form through the Supply Chain Due Diligence Act. Even if many complain about the administrative effort involved, this offers companies the opportunity to finally shape and tackle their ESG strategy in the area of “social” and to “take it to the next level”.

In its concrete implementation, the law obliges companies above a certain size (today, 3,000 employees; from January 2024, 1,000 employees) to check their supply chains for possible human rights violations and environmental damage and to correct them if necessary.

The effort involved in the legal obligation is one aspect that cannot be dismissed out of hand. Relevant service companies have meanwhile developed sophisticated and proven solutions for this, which reduce and partly automate this effort.

The other aspect is that all companies involved are now challenged to rethink their wait-and-see approach to the “social” part of their ESG strategies and to take more responsibility for their global supply chains.

Beyond the question of long-term profitability, this is a fundamental question of business ethics, of global responsibility to societies and the environment, even in the supplier countries, and of making the world a better place for future generations in these areas as well.