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Implementation by enterprises

Current Status

In the Coalition Agreement for the current legislative period, the German Government has agreed that the Act on Corporate Due Diligence in Supply Chains stays in place until its replacement by a law on international corporate social responsibility. The law will implement the European Union’s Corporate Sustainability Due Diligence Directive (CSDDD) in a low-bureaucracy way that is easy to enforce. During the transition period, there will be a reduction of burdens for companies falling under the scope of the Act on Corporate Due Diligence in Supply Chains.

The Federal Government has already initiated an amendment of the law to this effect. For further information see www.bmas.de (in German only).

An overview of the due diligence obligations for companies under the Supply Chain Act

The specific due diligence obligations for enterprises regarding respect for human rights are laid down in the Act on Corporate Due Diligence Obligations in Supply Chains. It requires enterprises to establish an appropriate and effective risk management system that is integrated into all relevant business processes. Adequate and effective means that the company uses its resources in a targeted manner to identify and address human rights and environmental risks in its supply chains.

The five core elements of the National Action Plan for Business and Human Rights (NAP) form the basis for the due diligence obligations set out in the Act. These due diligence obligations address

  1. the implementation of a risk management system
  2. the designation of a responsible person or persons within the enterprise
  3. the performance of regular risk analyses
  4. issuing a policy statement
  5. laying down preventive measures in an enterprise’s own area of business, vis-à-vis direct suppliers and – if there are indications that suggest a possible violation of human rights – vis-à-vis indirect suppliers
  6. taking remedial action
  7. establishing a complaints procedure
  8. documentation and reporting

In order to comply with their human rights due diligence obligations as defined by the Act, enterprises must define responsibilities within their organisation, for example by appointing a human rights officer.

Every enterprise within the scope of application of the Act is obliged to conduct a risk analysis as a first step. This means that they must first strive for transparency and identify the parts of their production and supply chain that carry particularly significant human rights and environment-related risks. This also includes the business areas of suppliers.

Below we have set out how such risk analysis can succeed in practice (German video with English subtitles):

If risks are identified, suitable preventive measures must be taken on the basis of the analysis in order to prevent violations. These include, for example, agreeing appropriate contractual human rights clauses with the direct supplier, implementing suitable procurement strategies, providing training or checking the measures taken by contractual partners. If the risk of a human rights violation at an undertaking’s own location or in the supply chain has been identified, appropriate measures must be taken to end or minimise it. This applies all the more if the human rights violation has already occurred.

Human rights risks at indirect suppliers, i.e. in the lower parts of the supply chain, must also be analysed, monitored and addressed if enterprises have real indications of possible human rights violations. Possible indicators include the nature of the goods, the countries of origin, the raw materials and upstream suppliers, information from authorities, reports of poor human rights conditions in the production region, or the affiliation of an indirect supplier with an industry that poses particular human rights risks.

Looking at measures that have been successfully implemented in practice illustrates how this can be successfully achieved (German video with English subtitles):

In addition, enterprises must set up a complaints procedure that allows those who are directly affected, as well as those who are aware of potential or actual violations, to report risks and violations.

The establishment of complaints procedures can take different forms, as these enterprises show (German video with English subtitles):

The Act on Corporate Due Diligence Obligations in Supply Chains requires enterprises that are subject to the Act to issue a policy statement on their human rights strategy. The statement must identify the environment-related and human rights-related risks identified and given priority in relation to the enterprise within the risk analysis. On this basis, preventive and remedial measures must be derived and complaint mechanisms must be described. The expectations placed on the enterprise’s own employees and suppliers in the supply chain must also be addressed. The policy statement must be approved by senior management and published.

Take a look at how a policy statement is implemented in practice (German video with English subtitles):

The fulfilment of the due diligence obligations must be continuously documented within the enterprise. Enterprises must provide an annual report providing transparent information to the Federal Office for Economic Affairs and Export Control (Bundesamt für Wirtschaft und Ausfuhrkontrolle, BAFA) on

  • whether and which human rights and environment-related risks the enterprise has identified,
  • what the enterprise has done to fulfil its due diligence obligations,
  • how the enterprise assesses the impact and effectiveness of the measures,
  • what conclusions it draws for future measures.

The report must be submitted to BAFA and made publicly available on the enterprise’s website no later than four months after the end of the financial year and must be kept available there for seven years. Business and trade secrets are protected in this context. Reports can be submitted to the BAFA via the electronic reporting questionnaire. Registration is required. Currently, the reporting obligation is suspended until 1 January 2026. During the transition period leading up to the implementation of a law on international corporate responsibility, the obligation will be waived, including for previous financial years. See how enterprises already report on the fulfilment of their due diligence obligations (German video with English subtitles):

You can find the full text of the Act in the Federal Law Gazette (in German). Here you will find more information about the five core elements of the NAP.

Effects of the Supply Chain Act on SMEs

As a rule, enterprises that do not fall within the scope of the Act shall also comply with their due diligence obligations. The National Action Plan on Business and Human Rights (NAP), which lays down corresponding expectations for all enterprises based in Germany, was adopted in 2016. The Act is broadly inspired by the NAP.

Enterprises outside the scope of the Act that are direct suppliers of enterprises covered by the Act, may be required to meet due diligence obligations as part of their contractual relationship (which may, for example, include provisions laying down human rights-related expectations).

However, owing to their nature, the obligations under the Act on Corporate Due Diligence Obligations in Supply Chains cannot simply be passed on to suppliers. This applies, for example, to reporting obligations vis-à-vis the authority and the general public. Nor does a supplier outside the scope of application of the Act have to fear control measures or sanctions by BAFA. In addition, enterprises that are subject to the Act remain themselves responsible for keeping an eye on their supply chains and for complying with the obligations of carrying out a risk analysis and taking preventive and remedial measures.

Further information on how small and medium-sized suppliers, too, can meet their responsibilities for the individuals in their supply chains as well as offers of support and practical examples.