The draft legislation for the Supply Chain Act, which is based on the UN Guiding Principles on Business and Human Rights and the resulting National Action Plan “Business and Human Rights” (NAP), has been adopted by the German Cabinet. After lengthy negotiations between the Federal Ministry of Economics and the Federal Ministry for Economic Cooperation and Development, the draft law is expected to be introduced for a vote during this legislative period. Under the law, starting in 2023, companies with 3,000+ employees would be required to monitor their supply chains and be liable for violations at their direct suppliers. Starting in 2024, the same would apply to companies with more than 1,000 employees. Changes included in the current draft have significantly weakened several aspects that many stakeholders had advocated for.
We have summarized the key points of the draft for you:
Scope: Only human rights and the immediate social standards – in particular working conditions and occupational safety – in the supply chain, are to be covered by the law. The due diligence obligation does not include environmental standards, unless these have a direct human impact.
Liability: There is virtually no liability along the entire supply chain in the new draft law. Liability is limited to the German company itself and its direct suppliers. Deeper in the supply chain, there is a graduated responsibility if there are violations of the due diligence obligations.
Risk analysis and transparency: According to the draft law, conditions at the German company and its direct suppliers must be assessed. Due diligence must be demonstrated through a risk assessment. Any indication of violations of social standards that result must be investigated and reported to downstream suppliers.
Sanctioning violations: Violations of the due diligence requirements may result in fines and penalty payments of up to 10% of the company’s turnover. Violations can result in exclusion from public tenders for up to three years. There is no civil liability.
Limiting the liability under the draft law to German companies and their direct suppliers, as well as the absence of civil penalties, are concessions made to the business lobby. There is strong criticism from Greenpeace, among others, who see the draft as a “hollowed-out paper tiger,” or too heavily influenced by the business associations. Indeed, the standards set by the Supply Chain Act could certainly be more concise and consistent.
The Supply Chain Act can be seen as a result of increasing demands for action by consumers and organisations, and clearly demonstrates the expectation that German companies conduct their business ethically.
To prepare for legal regulation of the supply chain and, indeed, to get ahead of the curve in this regard, we advise clients to immediately begin assessing risks in their supply chain and to adopt proactive, long-term measures towards improvement.
In our blog posts, we will continue to inform you about the current status of the Supply Chain Act, what impact the law will have on your company and what measures you can take to prepare.