What is the German Supply Chain Act?

The German Supply Chain Act—which took effect on January 1st, 2023—requires in-scope German companies to implement defined due diligence processes to identify risks of human rights violations within their supply chains and file annual reports on their due diligence activities. The act also includes environmental impacts within supply chains that may pose risks to human health. 

The act, also known as the Supply Chain Due Diligence Act (LkSG), has established a new industry standard, as it marks the first time that German companies will be legally responsible for human rights violations in global supply chains. It is related to several recent global laws intended to eliminate forced labor, child exploitation, and other human rights violations from supply chains, such as the EU Mandatory Human Rights Due Diligence Directive and the Norwegian Transparency Act.

Continue reading to learn more about the German Supply Chain Act and how it may affect your business. 

Who is in the scope of the German Supply Chain Act?

Companies with a principal place of business in Germany (administrative headquarters, central administration, branch office, or statutory seat) with at least 1,000 employees are in the scope of the German Supply Chain Act. The employee headcount also applies to employees working abroad and temporary employees on payroll for more than six months. Smaller companies and foreign suppliers are not within the scope of the law.

In-scope companies and their direct suppliers are required to fulfill various obligations according to their influence within the supply chain, including: 

  • Actions executed within their business
  • The actions of contractual partners
  • The actions of indirect suppliers 

Which human rights risks and environmental issues are targeted under the act?

The act applies to typical supply chain risks related to human rights and environmental issues that most companies already consider when fulfilling due diligence obligations. This includes, but is not limited to: 

  • Child labor 
  • Slavery and forced labor 
  • Occupational health and safety hazards 
  • Lack of an adequate living wage 
  • Pollutants in the workplace 
  • Unsafe disposal of hazardous waste  

What are the due diligence obligations?

Under the act, companies are required to implement appropriate risk management systems related to human rights issues, including environmental issues that may impact human rights. This includes designating an individual or a team within the business to monitor the company’s due diligence obligations. If or when a risk is identified within the supply chain, companies must take appropriate preventative measures to eliminate or minimize the risk.  

In-scope companies are also required to establish either an internal or an external complaint mechanism that enables victims of human rights violations, or individuals with information about violations, to identify instances of said violations.  

Finally, companies must submit an annual report to the appropriate authority outlining their fulfillment of due diligence obligations required by the act.  

What are the consequences of non-compliance?

Depending on the level of infraction, companies that fail to comply with the German Supply Chain Act may face fines up to €800,000 (approximately $863,404 in U.S. dollars). Furthermore, companies earning more than €400 million (approximately $431,702,000 in U.S. dollars) in annual turnover could face fines up to 2% of worldwide turnover. Additional consequences may include exclusions from public contracts for up to three years. 

Complying with the German Supply Chain Act

The largest challenge that companies face in complying with the German Supply Chain Act is identifying hidden risks in their supply chains—from human rights violations to environmental impacts that could negatively affect human health. The difficulty of identifying those risks is compounded without access to high-quality, validated supplier data. 

Source Intelligence offers various programs that help streamline the evolving complexities of ESG management, including responsible sourcing initiatives. Our Human Rights Program manages data gathering and reporting for all major human rights regulations, including the German Supply Chain Act. With our program, clients can take a deep dive into supplier practices and policies in real-time as data is collected, providing visibility into supply chain risk.  

Whether you are seeking software to streamline the compliance process or services to manage your human rights compliance initiatives, Source Intelligence can help you meet your goals. Select the button below to learn more about our Human Rights Program, or schedule a demo to get started.

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