Supply Chain Law: New German law mandating sustainable supply chain management

In a global village, where electronic parts for smartphones and computer chips may be sourced from Asia while raw materials for batteries (lithium, cobalt) are transported from South America, it is often impossible to be sure about labor conditions or production methods at the source site. The German Supply Chain Law aims to change this. It comes into force on January 1 2023.

Plattling, August 9, 2021

Supply Chain Law: new German law mandating sustainable supply chain management

Although that might seem a while off, companies should already be starting to prepare themselves for its consequences. Many German enterprises have international business operations that these laws will apply to, and will thus be confronted with higher standards for supply chain compliance. It’s important to be prepared in advance with mechanisms and plans to avoid damaging consequences. The work involved in implementing the new regulations should not be underestimated. After all, failure to comply will have consequences on one of a company’s greatest assets – its reputation and the trust its stakeholders put in responsible, compliant corporate management.

The German Supply Chain Law will form a foundation stone for corporate due diligence over supply chains. The overall goal is to ensure that people and planet are not being exploited. The law defines the supply chain as beginning where the raw materials are sourced, and extending through to delivery to the end customer. The German Federal Office for Economic Affairs and Export Control (BAFA) is the point of contact and will be the supervisory authority responsible for monitoring implementation of the requirements.

Often, poor conditions and other problems do come to public attention through media coverage and exposure, but frequently without any means for changing things. Child labor, exploitation, discrimination, poor or non-existent labor rights... in many countries, poor conditions are still the order of the day. Likewise, we continue to destroy our planet without thought for the consequences. However, the consequences of illegal deforestation, pesticide use and pollution of the air and water can be dramatic.

What is set out in the new law?

Companies must disclose exactly what they procure from where. This applies first and foremost to their direct suppliers. It becomes more difficult to track whether their upstream suppliers comply with human rights requirements and our duty to our planet. The new law will require mechanisms and methods for establishing standards all down the supply chain. Documentation must be maintained and reports submitted. The law is fundamentally about establishing equality between competitors, neither disadvantaging individual enterprises nor encouraging monopolies.

What does it mean for your company?

The law will initially only apply to companies with over 3,000 employees on their payroll. However, from 2024, it will also apply to companies with 1,000 employees if they have their headquarters or primary branch in Germany. This will include international corporations who operate branches in Germany.

If you feel that you’re “safe” as a small or medium-sized enterprise – not to put too fine a point on it, you’re wrong: small or medium-sized enterprises who form links in a chain supplying to a major customer will be affected and, as indirect suppliers, will be expected to fulfill the requirements that apply to the customer. In this case, the due diligence requirements only apply on an as-warranted basis. In other words, the enterprise must report problems if they become aware of violations. In such cases, preventive measures will likewise have to be introduced against the supplier identified as the source of the problems.  

What requirements will apply to companies from 2023?

The following concrete requirements will apply from 2023:

  • General declaration of respect for human rights
  • Procedure for determining risks relating to human rights violations
  • Risk management and defined remedial measures for avoiding negative effects on human rights
  • Complaint mechanism
  • Documentation and reporting

Essentially, the company’s existing compliance regulations will have to be extended. Employees already working in compliance management can take on the new tasks. Indeed, many larger corporations already have a human rights officer who is responsible for ensuring compliance with regulations and defining measures. Of course, all employees tasked with implementing the new regulations will need training. The company must also define its own complaint mechanism and continuously review the effectiveness of the mechanism.

At the end of the financial year, a mandatory report must be published, for example on the company’s website, describing compliance with due diligence requirements. The structure and content for this report are specified in the law.  The report must also be submitted to the German Federal Office for Economic Affairs and Export Control for review.

What are the consequences of non-compliance?

The compliance requirements are associated with financial penalties of up to 50,000 euros. Some violations may also be sanctioned with additional fines. These will be limited to up to two percent of the average (international) annual revenue or a maximum of 8 million euros. One unusual point is that the enterprise will not itself have a right to complain to German courts. Instead, they can commission a trade union or NGO to manage the process and track the claims.

Of course, while financial penalties can be serious for a company, damage to its image and reputation can be equally serious. Media attention can quickly go viral and it is generally almost impossible for the company to regain control of its image.

Can companies take responsibility without the support of the law?

Many companies will have been following the debate about the Supply Chain Law with furrowed brows: there will be numerous new requirements to fulfill and it will all mean additional bureaucracy. What will the end results be on prices? Nobody knows...

Of course, some companies have been demonstrating for years that they don’t need a law to take responsibility and commit voluntarily to higher standards. For example, our customer Rapunzel has been committed to organic farming and fair trade since as early as 1974. The company doesn’t believe its production should succeed at the cost of child labor or major environmental damage. Rapunzel is committed to close, mutually respectful collaboration with its suppliers and partners.

Read more about the philosophy of our customer Rapunzel.

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Norbert Kytka, Headquarters Plattling