In recent years, numerous regulations have come into force regarding business, human rights and environmental protection. As the main human rights duty bearers, governments of several countries have adopted regulations for responsible sourcing. We see these regulations at regional, international and national levels. In addition to the British Modern Slavery Actthe French due diligence law and the recent EU proposal for a directive on corporate due diligenceGermany has also adopted his Law on Due Diligence Obligations of Companies in the Supply ChainS (Lieferettensorgfaltspflingengesetz-LkSG) in July 2021. According to the German Federal Ministry of Labor and Social Affairs, it is through the German Supply Chain Act (GSCA) that “for the first time, the responsibility of German companies to respect human rights in global supply chains has been given a legal basis”. GSCA came into effect on January 1, 2023. The main objective is to ensure effective management of human rights and environmental risks and relative adverse impacts throughout the supply chain. The law imposes both similar and new due diligence obligations compared to already existing legislation in this area.
1. Scope of the German Supply Chain Act
The GSCA covers companies based in Germany or foreign companies with registered subsidiaries in Germany. These companies must have at least 3,000 employees throughout Germany for the last two exercises. The 3,000-employee threshold will be lowered to cover companies with 1,000 employees from 2024. The Supply Chain Act normally only applies to private sector entities, but also extends to public entities (i.e. companies, foundations and public law bodies) when they carry out commercial activities in the market.
In terms of scope of activities, the law regulates all products or services of the company, from purchasing to the final delivery of the product or service to the end customer. Depending on the company’s area of influence, companies must comply with due diligence obligations regarding:
- their own business premises,
- the actions of contractual partners, and
- the actions of other (indirect) suppliers.
But the law indirectly and unofficially also applies to companies that do not meet the threshold of 3,000 employees (or 1,000 employees from 2024) when fulfilling the role of direct or indirect supplier. As part of the due diligence requirements, the law requires companies within its scope to integrate their due diligence policies into their contractual relationships. But of course, the SMEs have no legal compliance responsibility for the requirements of the law. Unlike corporations in its scope, SMEs cannot be penalized as a result of the Supply Chain Act.
2. Due diligence obligations arising from the Supply Chain Act
The Corporate due diligence obligations arising from the GSCA are inspired by the OECD Guidelines on Responsible Procurement. They are also similar to the above regulations. The law requires companies to establish an appropriate and effective risk management system that is integrated into all relevant business processes. A risk management system is considered ‘effective’ when human rights and environmental risks are identified, mitigated, minimized and eliminated.
In practice, the due diligence obligations require the following:
- the implementation of a risk management system
- the designation of a responsible person or persons within the company
- carrying out regular risk analyses
- issuing a policy statement
- taking preventive measures in the company’s own work area, towards direct suppliers and – if there are indications of a possible violation of human rights – towards indirect suppliers
- taking remedial measures
- setting up complaints mechanisms
- documentation and reporting
3. What’s new in the German Supply Chain Act compared to other similar regulations
An important distinction between the German Supply Chain Act and the EU proposal for Corporate Sustainability on Due Diligence (CS3D) lies in their application modalities. After all, the CS3D applies at the individual level to determine the threshold of the number of employees. The EU directive applies to EU companies with more than 500 employees and a net turnover of €150 million. It also applies to EU companies with more than 250 employees and a net turnover of €40 million in six risk sectors. For companies from outside the EU, the participation criterion is a net turnover of €150 million in the EU or €40 million in high-risk sectors. As for the application modality itself, while the CS3D applies at the individual level, the Supply Chain Act, like the French Due Diligence Act, applies at the group level. Within the framework of the GSCA, the calculation to determine the employee thresholds takes into account all employees working in Germany in all associated companies, branches or divisions, even if the entities are registered as separate companies.. Employees are also taken into account, regardless of the form of employment contracts. This concerns both full-time employees and part-time employees (if the employment contract is at least six months).
A second point of differentiation with the CS3D lies in the area of application. While the CS3D leaves the freedom to include financial institutions and investments within the scope of the directive at national level to Member States, the Supply Chain Act applies to all companies that meet the number of employees criterion mentioned above.
With regard to the French due diligence law, the added value of the Supply Chain Act consists in the possibility of imposing a fine on the companies concerned for non-compliance. Although such a possibility is excluded in French law, the Supply Chain Act provides for the following sanctions:
- fines up to 800,000 euros,
- for companies with an annual turnover of more than 400 million euros, fines of up to 2 percent of global turnover,
- up to three years’ exclusion from government contracts if a fine of at least 175,000 euros has been imposed.
The possibility of punishment within the Supply Chain Act makes it more binding and provides more guarantees for implementation compared to the French Due Diligence Act. The CS3D also includes the possibility of punishment within the sanctions, but leaves this to the discretion of national authorities. A second point of distinction is that the GSCA applies to all companies, without regard to their legal form, while the French Due Diligence Law only applies to French stock multinationals with 5,000 employees in France or 10,000 employees worldwide.
Conclusion: Ksapa gathers methodologies and expertise to ensure GSCA compliance of global supply chains
Ksapa is an international initiative that works with many of the leading European, American, African and Asian buyers. Ksapa assists its clients with both the methodological framework for identifying key risks of non-compliance. Ksapa also has the human, digital and financial resources to deploy programs across supply chains to reduce risks at source around the world.