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Corporate Social Responsibility: Draft of so called Supply Chain Act for German Companies

On March 3, 2021, the German Federal Government agreed on the draft of a so called Supply Chain Act. It is intended that the German Bundestag (Parliament) adopts it before the summer recess. The aim of the draft act is to make major companies based in Germany responsible for respecting human rights and protecting the environment and the health of people worldwide. It is to come into force on January 1, 2023 and will initially only apply to companies with more than 3,000 employees. From 2024, the law will also cover companies with more than 1,000 employees. After that, the scope of application will be evaluated.

For the purposes of the new act, the term “supply chain” covers all the inputs that a company uses in order to manufacture a product or provide a service, from the acquisition of the raw materials to delivering it to the end customer.

The requirements that companies must meet are tiered, in particular depending on the degree of influence the company has on those committing the violation and on the different stages within the supply chain. In the context of its own business operations and in the context of a direct supplier’s business operations, the companies must implement the following measures:

  • Draft and adopt a policy statement on respecting human rights.
  • Carry out a risk analysis by implementing procedures for identifying disadvantageous impacts on human rights.
  • Engage in risk management (incl. remedial measures) to prevent potential negative impacts on human rights.
  • Establish a complaint mechanism.
  • Implement transparent public reporting.

In the event of a violation of human or workers’ rights, a company must immediately take remedial action in its own area of business that will cause the violation to cease. In addition to that, it must also introduce further preventive measures. If the company is not able to end a violation by a direct supplier in the foreseeable future, such company must draw up a tangible plan to minimize and avoid the problem.

Regarding indirect suppliers, the due diligence obligations apply only as warranted by the circumstances. If the company learns about a possible violation by an indirect supplier, then it must immediately conduct a risk analysis, implement a strategy to minimize and avoid the problem and firmly establish appropriate prevention measures vis-à-vis the party committing the violation.

The aim of the act is not that business relations are terminated. Instead the aim is to lastingly establish improved protection of human rights within the same. The only case, in which business relations need to be terminated is when a serious violation of human rights has been found and the measures that have been taken so far within the company’s strategy have failed to succeed within a set period of time.

The draft act does not provide for any global minimum wages, but merely refers to the ILO conventions, which envisage decent wages.

Compliance with the act will be monitored by the Federal Office for Economic Affairs and Export Control. Infringements may result in fines. The new act does not create any new liabilities under civil law. Liability under civil law according to German and foreign laws continues to apply.

Legislative Action with regard to the monitoring of supply chains can also be expected at the European level. On March 10, 2021, the EU Parliament voted in favour of a legislative report recommending that the EU Commission drafts a legislative proposal. In its recommendation, the EU Parliament goes significantly beyond the provisions of the German draft act. Small and medium-sized enterprises are also to be addressed if they are listed on the stock exchange or are active in economic sectors that bear a high risk of violations. In addition, companies shall have due diligence obligations along the entire supply chain, i.e. also with regard to indirect suppliers. Furthermore, the civil liability of companies is to be extended. A proposal for a supply chain directive is expected from EU Commissioner for Justice Didier Reynders in June this year. However, the adoption of an EU Supply Chain Directive is not expected before 2022.

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