What is the scope and applicability of the German Supply Chain Act?
The German Supply Chain Act targets enterprises with substantial operations in Germany, setting forth a phased compliance approach based on employee headcount. On Jan. 1, 2023, it applied to companies with more than 3,000 employees. Starting on Jan. 1, 2024, its reach widened to include companies with 1,000 or more employees. The law applies to businesses with central locations in the country, such as central administration, principal place of business, administrative headquarters, a statutory seat within Germany, or branch offices.
Notably, the German Supply Chain Act’s influence extends beyond large entities. Smaller companies might also be subject to the act’s provisions if they serve as direct or indirect suppliers to larger firms within the scope of the legislation.
How does the act align with human rights and environmental standards?
The German Supply Chain Act aligns with internationally recognized human rights conventions and environmental treaties. It explicitly prohibits a range of human rights violations, including child labor, forced labor, occupational safety breaches, discrimination, and the suppression of workers' and unions’ rights to associate freely. Additionally, the act addresses environmental risks, referencing the Basel, Minamata, and Stockholm Conventions to regulate the handling of hazardous substances and waste.
What are the due diligence requirements?
The cornerstone of the German Supply Chain Act is the establishment within companies of a robust due diligence framework. This framework encompasses the following components:
- Risk management systems. Companies must create systems to identify, assess, and mitigate risks related to human rights and environmental standards in their supply chains.
- Responsibility designation. Businesses must assign clear internal roles and responsibilities for implementation and oversight of due diligence processes.
- Risk analysis. To stay abreast of potential issues within the supply chain, companies must regularly assess risks.
- Policy communication. Companies must adopt and disseminate policies that articulate their commitment to upholding human rights and environmental standards.
- Preventive measures. Each company must dictate its own proactive steps to prevent violations within internal operations and those of direct suppliers.
- Remedial action. In the event of a security breach, companies are obliged to take corrective measures to respond to and rectify the situation.
- Grievance mechanism. Businesses must establish a complaint procedure that allows for reporting and resolving grievances related to the due diligence obligations.
- Indirect supplier engagement. Companies must extend due diligence to risks associated with indirect suppliers.
- Documentation and reporting. Businesses must maintain comprehensive records of their due diligence efforts and report to the authorities within four months after their financial year-end.
