The Supply Chain Corporate Due Diligence Act

What is the new law?

There is a growing trend around the world to enact due diligence legislation. In 2017, France became the first country to adopt a national law based on UN guidelines. In 2019, the Netherlands approved a child labor law, and the UK has a Modern Slavery Act. In the United States and Switzerland, legislation has been approved, and Hong Kong and Canada are preparing legislation. IndustriALL Global Union’s IndustriAll Europe is calling for a due diligence law at the EU level.

Germany’s two ministries – the Ministry of Development and the Ministry of Labor – have joined forces to enact a federal law by 2021 prohibiting child labor, non-compliance with labor laws, and violations of environmental standards in the supply chain.

The federal government has twice asked businesses to voluntarily disclose supply chain information. In 2016, 464 out of 3,000 companies responded, in 2019, 455 out of 2,250 responded. Of those who replied, not all of them were able to confirm compliance with the standards. The Ministry of Development considered the results unsatisfactory, therefore, instead of a voluntary approach, a compulsory one is now connected.

In February of this year, the text of the bill was published, the law imposes legal obligations on companies registered in Germany to ensure that human rights and relevant environmental standards are respected at all levels of the supply chain.

Subcontractors in other countries will have to adhere to the same standards, although for indirect suppliers, checks will only be carried out in the event of problems. The law will hold German companies accountable for abuses in their supply chains. If the company itself does not remedy these violations, unions and NGOs have the right on behalf of the victims to apply to a German court with a claim against the company.

After months of deliberation, the German parliament passed the “Corporate Due Diligence Act in Supply Chains” on June 11, 2021. The law will enter into force on January 1, 2023, giving companies a transitional period to prepare to meet their new supply chain due to diligence obligations by revising existing compliance management systems, creating new processes, and training their employees accordingly.

To whom does this apply?

The Supply Chain Corporate Due Diligence Act will go into effect in 2023 and will initially apply to businesses with 3,000 or more employees, then to businesses with 1,000 or more employees starting in 2024. This will ultimately affect approximately 4,800 companies. These companies must identify human rights and environmental risks from direct suppliers and, if they gain “informed knowledge” of potential abuse, also from indirect suppliers. They must take countermeasures and document them with the Federal Economic Affairs and Export Administration (BAFA), which can impose fines if companies fail to comply with their due diligence obligations. Affected parties may require BAFA to take action.

What areas of business will be affected?

The Supply Chain Due Diligence Act requires these companies to establish processes to identify, assess, prevent and address human rights and environmental risks and impacts in their supply chains and their operations. They must also ensure that employees of indirect suppliers (suppliers with whom they have no direct commercial relationship) can file a complaint alerting the company to human rights or environmental violations.

Risks that companies need to consider include:

Forced labor
Child labor
Discrimination
Violations of freedom of association
Unethical employment
Unsafe working conditions
Deterioration of the environment

Companies are also required to publish an annual report describing the steps they have taken to identify and address these risks.

Key aspects of the law

The law initiates the need to move from voluntary corporate social responsibility to full respect for human rights and environmental protection, which will allow for legal considerations and ensure due diligence for companies throughout the supply chain.
Companies have a responsibility to take precautions through risk management and analysis to help minimize and prevent potential damage to people and the environment.
The law establishes strict regulatory oversight and enforcement. If companies fail to comply with their due diligence obligations, they are acting in violation of the law and may be fined by the competent authorities.
The law introduces representative action on behalf of victims. In the future, affected parties may authorize NGOs and trade unions to bring such claims – using already existing legal grounds – on their behalf directly in German courts. This can reduce the obstacles that foreign victims face when trying to sue in German courts – for example, reduce the high costs of such procedures or guarantee anonymity in the event of threats of prosecution.
Works councils and business committees will receive new rights. When the law enters into force, they will have the right to receive information and advice on corporate due diligence in supply chains under the Supply Chain Law. This will enable elected workers’ representatives to work outside the company to strengthen social standards, human rights, and environmental commitments.
The law regulates several environmental obligations arising from three ratified conventions:

Ban on the production of mercury-added products following paragraph 1 of Article 4 of the Minamata Convention.
Prohibition of the use of mercury or mercury compounds in industrial processes following paragraph 2 of Article 5 of the Minamata Convention after the date of production cessation.
A ban on the handling of mercury waste violates the requirements of paragraph 3 of Article 11 of the Minamata Convention.
The ban on the production and use of chemicals following paragraph 1 of article 3 letter an of the Stockholm Convention on Persistent Organic Pollutants (POPs Convention).
Prohibition of non-environmentally friendly handling of chemical wastes, their collection, storage, and disposal in violation of the requirements of paragraph 1 of Article 6, letter d of the POPs Convention.
A ban on the export of hazardous and other wastes, following paragraphs 1 and 2 of Article 1 of the Basel Convention, to a state party that prohibits the import of such wastes, to an importing state that does not give written consent to a specific import, to a non-state party or to an importing state, where the waste will not be managed in an environmentally sound manner.
Ban on the export of hazardous wastes from states listed in Annex VII of the Basel Convention to states not listed therein.
Ban on the import of hazardous and other wastes from non-state parties to the Basel Convention. (§ 2, paragraph 3).
Works councils and business committees will receive new rights. When the law enters into force, they will have the right to receive information and advice on corporate due diligence in supply chains under the Supply Chain Law. This will enable elected workers’ representatives to work outside the company to strengthen social standards, human rights, and environmental commitments.

What measures need to be taken by the business?

Adopt a political statement to protect human rights in your supply chains.

This policy statement should outline how to meet human rights and environmental due diligence obligations in the supply chain, the specific risks identified and the company’s human rights and environmental expectations for its employees and suppliers.

Establish or adopt a risk management system and conduct risk analyzes regularly.

Companies must determine whether there is a risk that their own business or business in the supply chain violates human rights.

Apply preventive measures within your organization and concerning direct suppliers.
Implement a complaints system.

Companies should establish, implement and publish a written complaints mechanism through which (potentially) affected individuals and those with knowledge of possible violations can point out risks and human rights violations.

Documentation and reporting obligations.