Lieferkettengesetz: How to prepare for the Supply Chain Act
On January 1st 2023, businesses across Germany must comply with Lieferkettengesetz, a new German law mandating proper due diligence in the supply chain. From environmental degradation to modern slavery, Lieferkettengesetz takes aim at a whole host of pressing issues through operational and reporting obligations underpinned by hefty fines and the threat of civil claims. Companies can no longer turn a blind eye to the behaviour of their suppliers.
But what exactly is Lieferkettengesetz, who does it affect, and what must a company do to comply?
In this article we discuss the purpose, practicalities and implications of the German due diligence law, and offer a three-point plan to improve transparency in your supply chain and stay on the right side of the law.
What is Lieferkettengesetz?
In 2021, a study by the German government revealed that only 13-17% of German companies perform adequate supply chain due diligence with respect to human rights. Among growing calls for corporate Germany to shoulder more environmental and humanitarian responsibility, in June of the same year, the Bundestag passed the Act on Corporate Due Diligence in Supply Chains, or, as it is more commonly termed, ‘Lieferkettengesetz’.
Based on the UN’s Guiding Principles on Business and Human Rights, the act targets a number of human rights transgressions in the supply chain, including: child labour, forced labour and slavery; the denial of workers’ rights, such as occupational health and trade union rights; discrimination and unequal treatment; and the failure to comply with environmental standards and environmental rights in the context of human health and suffering.
The Lieferkettengesetz will prohibit all of these behaviours in the supply chain through mandating a number of reporting and risk management solutions. These include:
- The adoption of a policy statement that describes the procedures the company will implement to comply with the Supply Chain Act
- The establishment of a risk management system and the introduction of regular risk analyses
- The implementation of prevention measures within the organisation and the supply chain
- Regular and transparent documentation and reporting
If a company fails to meet its obligations, it faces heavy fines: up to 800,000 EUR for smaller companies, and up to 2% of annual worldwide turnover for companies with a turnover of over 400 million EUR. Not only that, under the terms of the act, victims of human rights abuses will be able to file civil claims with the German courts, while trade unions and NGOs will be able to file claims on the victims’ behalf. This could lead to potentially exorbitant legal costs and settlements.
Who does Lieferkettengesetz affect?
Lieferkettengesetz applies to any companies who have their head office, a branch office, their administrative headquarters or a registered office in Germany. This includes multinationals with operations in Germany. The act will be implemented in phases. From January 1st 2023, companies with over 3,000 employees must comply – that’s an estimated 600 German companies – and from January 1st 2024, the act will be expanded to companies with over 1,000 employees. For multinationals, the total number of employees is calculated as the number of employees working in Germany.
Tier 1 suppliers are the primary focus of the Supply Chain Act, whereby the human rights obligations must be contractually agreed. The Supply Chain Act is lighter touch for tier 2 suppliers, who are to undergo ‘passive monitoring’ with respect to human rights.
All this does not mean smaller companies are off the hook. Firstly, the size brackets will probably be widened in the future. In 2026, the German government will undertake a review of Lieferkettengesetz with expansion of the act likely in mind, while further supply chain regulations have been mooted at a European level, which could lower the company size thresholds and broaden the obligations.
Secondly, the Supply Chain Act will affect more than those directly under its jurisdiction. In order to mitigate exposure, the larger companies will inevitably mandate greater due diligence throughout their own supply chains, with indemnities running all the way down. The ripples of Lieferkettengesetz will be felt throughout the economy, from multinationals to SMEs.
In short, regardless of the size of the company, it will feel the impact of Lieferkettengesetz. It’s important for all companies to implement the appropriate controls now – from a legal standpoint, and, needless to say, a moral standpoint too. And don’t forget, with greater societal focus on responsibility and sustainability, a loss in the court of public opinion could be far more costly than a fine.
How to prepare for Lieferkettengesetz
Simply put, the best way to comply with the Supply Chain Act is to improve transparency in your supply chain. But what does this mean and how can it be achieved?
Before we start with the practicalities, let’s discuss mindset, because complying with the Lieferkettengesetz should not be seen as a cost – but as an opportunity.
At OCM, we believe a sustainable and responsible supply chain is not only a moral and soon-to-be legal obligation, but an economic force for improving performance. For example, ensuring that workers throughout the supply chain are treated fairly and paid properly promotes an inclusive working environment which in turn enhances the quality of the end product or service, while approaching the local environment with respect can, for instance, maintain or even increase future crop yields.
We encourage companies to truly embed a sustainable and responsible mindset in their operations, and to use Lieferkettengesetz as one of several levers to ensure this happens at every level, from the board room to the factory floor and out into the supply chain.
So, with this in mind, here is our three-point plan to prepare for Lieferkettengesetz:
When should preparation for Lieferkettengesetz begin?
To be blunt, preparation for the German Supply Chain Act should have started yesterday.
Firstly, the changes required are long and complex. To screen and select the right personnel; to design, implement and embed process changes; to train the supply chain department and associated departments; and to ensure that all is working smoothly before the start date of January 1st 2023 – all of this takes time and effort, and there’s no room for getting it wrong.
And that’s not to forget that in some cases, companies may have to extricate themselves from incompliant supplier relationships. At best, this could mean a moderate number of tender processes; at worse, the restructuring of the entire supply chain. Such activities can take months, or longer.
Secondly, as previously alluded to, a sustainable, responsible supply chain will not only fulfill moral and legal obligations, it will improve performance too. To that end, a move towards a sustainable supply chain should not only adhere to a legal deadline, it should be happening now, and at speed, to enhance prospects in the immediate and long term.
How OCM can help with the preparations for Lieferkettengesetz
Either your house is in order. You already have the appropriate controls in place and are looking towards the January 1st 2023 deadline with little apprehension or stress. Not much will change as the new year rolls in...
Or more likely, you are beginning to realise the scale and complexity of the changes required to comply with the Supply Chain Act. Either the transformation hasn’t started yet, or it isn’t progressing quickly enough to meet the deadline. You are bogged down in ineffective meetings, without the proper expertise to make impactful decisions. Your employees are stretched too thin, trying to juggle day-to-day responsibilities with a project that, if not carried out properly, will have heavily punitive, even existential, consequences.
Whether you’re one of the 600 companies affected by the first wave of the German supply chain act, or one of the thousands that will come under its jurisdiction in 2024, or a tier 1 supplier under contractual obligations to comply with Lieferkettengesetz, the challenges you are facing are not unique – and help is at hand.
At OCM, we have years of experience in enacting complex supply chain transformations governed by stringent legal obligations, and our ethos regarding the sustainable supply chain means our changes are built to last. We can provide the resources, expertise, and drive to bring your company in line with the German Supply Chain Act.
Interested in finding out more about our modules and services or would you like to talk to us about how we can help? Please don’t hesitate to get in touch, we would love to hear from you.
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