Global supply chains cross multiple countries and borders, making them incredibly complex. On top of the challenges that come with managing overseas suppliers, such as maintaining the flow of goods, and navigating currency fluctuations, the growing number of regulations and laws that companies must abide by is an additional burden. By Jessica McGoverne, Director of Policy and Corporate Affairs at Sedex
The Supply Chain Due Diligence Act – a new German law – becomes effective in January 2023 and will apply to companies operating or trading in Germany. This means it will become a legal requirement for certain businesses to manage social and environmental issues in their supply chains, through more responsible business practices.
To get ready for this new law, businesses within its scope should start preparing now. Companies will need 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 – up to 2% of a company’s global turnover. Businesses could also face potential bans from accessing public contracts in Germany for up to three years.
The legislation is a welcome step towards creating a level playing field for sustainable business operations and managing companies’ social and environmental impacts, but it comes with many requirements.
Firstly, check to see if you’re affected
Any UK business operating with over 3,000 employees in Germany will be affected by this new law. 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.
The law will apply to businesses with more than 1,000 employees from 2024.
Carry out risk and impact assessments on your suppliers
Businesses should begin assessing their supply chains to identify the social and environmental risks and impacts they need to manage. 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. These issues are based on international standards, such as the International Labour Organization’s list of core labour rights (the “fundamental conventions”). They include:
- Environmental issues such as the production and use of organic pollutants, how hazardous waste is handled, and how businesses use products containing mercury.
- Social issues such as 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.
Risks in supply chains change constantly, so companies should aim to risk assess at least once a year. Technology can help to do this effectively. Harnessing 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.
Conduct other due diligence activities
The Act also outlines additional activities to avoid or reduce negative impacts. Companies should incorporate these activities into their regular operations, and report on these annually, including their effectiveness and what impacts they identified. Activities include:
- Risk management to evaluate and manage the risks businesses identify in their operations and supply chain.
- Preventive measures 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 to provide an internal complaints system for your workforce and suppliers’ workers, where people can share feedback safely and confidentially.
- Documenting, monitoring and evaluating due diligence activities, keeping records on file for at least seven years.
Produce annual due diligence reports
Businesses will need to produce annual reports demonstrating 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 also publish the report on their business websites.
Finally, make room for further requirements
The German government is yet to share all the details of the Act. This means there are still some unknowns and likely further requirements. For instance, 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 is still unknown.
It’s time to act now
Preparing for new laws will always be daunting. To get ahead of the game, businesses can start their preparations now.
Gathering data on their direct and indirect suppliers, harnessing the right tools to analyse this data, and building visibility of their supply chains are crucial first steps. This visibility will bring businesses long-term benefits and will also build a foundation for sustainable business operations, ultimately contributing to long-term business success.
