May 19, 2022
Global supply chains are incredibly complex, crossing multiple countries and borders. This complexity brings many challenges for businesses, including managing overseas suppliers, maintaining the flow of goods, and navigating currency fluctuations. One of the biggest challenges is the growing number of supply chain laws that companies need to understand and meet.
In January 2023 a new German law, known as the Supply Chain Due Diligence Act, becomes effective and applies to companies operating or trading in Germany. The law introduces a legal requirement for businesses to manage social and environmental issues in their supply chains, through more responsible business practices. The legislation is a welcome step towards creating a level playing field for sustainable business operations and managing companies’ social and environmental impacts.
Given the Act comes into effect on 1 January 2023, businesses within its scope should start preparing now to ensure they’re ready. The Act requires companies to show that they are conducting activities to identify and address any negative impacts on people and the planet that their business may have contributed to. Failing to meet the legislation could pose hefty fines of up to 2% of global turnover and potential bans from accessing public contracts in Germany for up to three years.
To prepare for this new law, businesses can take a few key actions in the coming months and take a data-led approach to support their journey. Accessing accurate information on business operations and the supply chain will help to identify, assess and manage sustainability-related issues, to meet legislative requirements.
Check whether your company falls under the scope of the Act
This law will affect any UK business operating with over 3,000 employees in Germany. This includes employees of all subsidiaries and businesses belonging to a parent company who work in Germany, employees usually based in Germany currently working abroad, and temporary workers with contracts of over six months.
From 2024, the law will apply to businesses with more than 1,000 employees.
Conduct risk and impact assessments on your suppliers, focusing on specific issues
Companies can begin assessing their supply chains to identify the social and environmental risks and impacts they need to manage. Assessments are a key part of supply chain due diligence. The German Act highlights the issues to look for, and requires companies to look at their own operations and entire supply chain including producers of raw materials.
Environmental issues include the production and use of organic pollutants, how hazardous waste is handled, and how businesses use products containing mercury. Social issues include child labour, forced labour, and health and safety. Discrimination, inequality, and barriers to freedom of association are also mentioned, along with wage theft and whether wages are paid in line with relevant laws. These issues are based on international standards, such as the International Labour Organization’s list of core labour rights (the “fundamental conventions”).
Risks in supply chains change constantly, so companies should aim to risk assess at least once a year. Technology provides powerful tools to support this – for example, a data-led risk assessment tool enables a business to quickly analyse and compare risks across a global supply chain. These tools use information on suppliers’ locations, operations and workforces to highlight social and environmental concerns.
Companies can also seek external advice to help identify all the social and environmental issues they need to look at and develop a supply chain due diligence programme.
Start carrying out other due diligence activities
Alongside regular risk assessment, the Act outlines other activities businesses need to carry out to avoid or reduce negative impacts. Companies should make certain activities part of their regular operations, and report on these annually, including their effectiveness and what impacts they identified.
- Risk management: Having a system in place to evaluate and manage the risks businesses identify in their operations and supply chain.
- Preventive measures: Taking steps to prevent and reduce these risks. This can include embedding responsible procurement practices, training on labour rights for company staff, or monitoring suppliers to confirm that they also meet the requirements of all relevant laws.
- Grievance mechanisms: Providing an internal complaints system for your business’s workforce and suppliers’ workers, where people can share feedback safely and confidentially. For example, a mobile app can capture anonymous feedback from employees all over the world. These grievance mechanisms should support people to report social and environmental issues or incidents linked to the actions of any business in a company’s supply chain, including indirect suppliers.
- Documenting, monitoring and evaluation: Recording all these due diligence activities and keeping records on file for at least seven years.
Prepare a due diligence report
Businesses will need to produce an annual report showing how they manage social and environmental issues in their supply chains. This should cover issues identified, processes implemented, and activities undertaken in the previous financial year. It should also show how the business assessed the effectiveness of its activities and lessons learned.
Companies need to submit the report to the German Federal Office for Economic Affairs and Export Control (BAFA) within four months of their financial year-end, and publish the report on their business websites.
Prepare for additional requirements
The German government is yet to share all the details of the Act, so there are still some unknowns. For instance, it’s not yet clear whether businesses will have to explicitly state in their annual reports that they’ve considered a risk and concluded it’s not relevant to their supply chain.
Preparing for a new law can feel like a daunting task. Businesses can get ahead by gathering data on their direct and indirect suppliers, harnessing the right tools to analyse this data, and building visibility of their supply chains. This visibility brings businesses long-term benefits and is a crucial foundation of sustainable business operations for long-term success.
We recommend businesses look out for any news related to the Act, so that they are ready to respond and avoid potential penalties.
Jessica McGoverne is a strategic communications and corporate affairs leader with over 15 years of experience leading successful multi-national campaigns within government, not-for-profit and private sectors, helping to build effective long lasting relationships and influence political decisions. Expertise includes public affairs, stakeholder engagement, crisis communications and managing complex communications.
Sedex is an ethical trade membership organisation working with businesses to improve working conditions in global supply chains. Headquartered in London and with offices in multiple continents, it provides an online platform, tools and services to help businesses operate responsibly and sustainably, protect workers and source ethically.