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Act on Corporate Due Diligence in Supply Chains

Women in Ethiopia harvesting tea leaves.
Source:  iStock

On 3 March 2021, the Federal Cabinet approved the draft Act on Corporate Due Diligence in Supply Chains. This is the first time the responsibility of German companies to respect human rights in global supply chains has been put on a legal footing. On 11 June 2021 the German Bundestag has decided the law.

We have summarised the most important questions about the Supply Chain Act for you:

We consume fruit from Africa or South America, chocolate from the Ivory Coast and coffee from Brazil. We wear clothing made in Asia, our mobile phone is made up of individual components that are produced all over the world. But not all countries offer people protection against exploitation, child labour or poor working conditions. We need to be more responsible in our economic activities.

The manufacture of products and the provision of services around the world must be in compliance with human rights. Our prosperity must not be at the expense of others.

The Act improves justice for workers around the world and empowers victims of human rights violations and civil society. The Act also creates legal certainty for German companies. For the first time, binding rules are laid down regarding the due diligence obligations that enterprises in the supply chain must comply with. Compliance with these rules creates a fair competitive environment for all companies. Companies that are already taking care to respect human rights in their production chains should no longer suffer a competitive disadvantage as a result. On the contrary, the proof of sustainable and responsible corporate governance in terms of human rights and the environment should become an accolade.

The foundation for the Supply Chain Act was already laid in recent years. In 2016, the Federal Government launched the National Action Plan for Business and Human Rights (NAP) to contribute to a more socially just globalisation together with companies. This is based on the United Nations Guiding Principles on Business and Human Rights. In addition to state protection and judicial and extrajudicial remedies, corporate responsibility is at the centre of the Act. The Federal Government also supports enterprises in meeting their due diligence obligations. In cooperation with industry sectors with particular human rights risks, specific guidelines are currently being developed for use in practice.

However, a survey of businesses conducted by the Federal Government over several years (NAP monitoring) showed that only about one fifth of all German-based companies with more than 500 employees sufficiently meet their due diligence obligations in their supply chains. This shows that a voluntary commitment does not suffice. In the coalition agreement, the Federal Government agreed to take legislative action at a national level in this case and, at the same time, to work towards binding rules at a European level.

The Federal Government will revise and update the National Action Plan in 2021 in close collaboration with many stakeholder groups. As part of this review, the Due Diligence Act will be seamlessly integrated in the broad overall strategy on business and human rights. In addition to the Act, which applies to enterprises, there are other adjustments that can be made, for example in the design of state support programmes, to improve the protection of human rights in the global economy. And the revised NAP will consolidate the support available to help enterprises implement the new law and make it more visible.

The Act obliges enterprises with their head office, principal place of business, administrative headquarters, registered office or branches in Germany with at least 3,000 / 1,000 employees within Germany to respect human rights by implementing certain due diligence obligations relating to their own business area, the actions of a contractual partner and the actions of other (indirect) suppliers.

Yes, the Act applies in the whole supply chain. Even if the obligations depend on where in the supply chain the risk occurs, the responsibility of enterprises does not end at the factory gate but applies from start to finish. Business relations and production methods of suppliers must also be considered. It is key for enterprises to take forward-looking action to prevent human rights violations in the manufacturing of their products.

The Supply Chain Act lists and refers to the international agreements that define human rights. These include, inter alia, the prohibition of child labour, protection against slavery and forced labour, health and safety at work and related health risks, the payment of an adequate wage, the right to form trade unions and employee representation bodies, and access to food and water.

Enterprises need to introduce and effectively implement an appropriate risk management system in the whole supply chain and across all key internal business processes. In particular, they must carry out a risk analysis and take preventive and remedial action. This means that they must first identify the parts of their production and supply chain that carry particularly significant risks to human rights and the environment. This also includes the business areas of suppliers.

Next, suitable preventive measures need to be taken to prevent violations. This could, for example, be the agreement of pertinent contractual human rights clauses with the supplier. Appropriate measures must also be taken to end or minimise any violation that has already occurred (remedial action). Human rights risks at indirect suppliers, i.e. in the lower tiers of the supply chain, must also be analysed, observed and addressed if enterprises become aware of them and there are real indications of such risks – for example, due to information provided by the authorities, reports of poor human rights records in the production region, or the fact that an indirect supplier belongs to an industry with particular human rights risks.

Enterprises are obliged to designate a person responsible within the enterprise to monitor compliance with the due diligence obligations, for example a human rights officer. Management must regularly obtain information about the work of the responsible person/s.

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

Enterprises must submit an annual report to the competent public authority on how they are meeting their due diligence obligations.

Large fines, intended to act as a deterrent, may be imposed to enforce compliance with the law. If enterprises fail to comply with their obligations to carry out a risk analysis, to establish a complaints procedure, to take preventive measures and to effectively stop any known human rights violations, they face onerous fines of up to 8 million euros or up to 2% of annual turnover. The fines system based on turnover applies only to enterprises with an annual turnover of more than 400 million euros.

Similarly, enterprises that break the law may, if they are subject to a minimum fine of a certain amount (the threshold depends on the severity of the infringement: EUR 175,000 or 1.5 million, 2 million, 0.35% of annual turnover), be excluded from the award of public contracts for up to three years. A public authority is provided with effective enforcement tools to monitor an enterprise’s supply chain management.

The competent public authority has extensive control powers. This includes, for example, official instructions to enterprises to carry out specific actions to fulfil their obligations or requests for the provision of information.

Foreign victims of human rights violations are already able to sue a German company in Germany claiming that it has infringed their rights. The German Ministry of Justice has issued a detailed brochure setting out the circumstances and ways in which those affected can seek redress in German courts. In practice, however, this has so far not had any practical relevance because many people affected had neither the know-how nor the means to bring legal proceedings in Germany.

The Act addresses this problem and now strengthens the victims of human rights violations by introducing a special capacity to sue. In future, trade unions or non-governmental organisations (e.g. the aid organisations, Brot für die Welt, Misereor, Oxfam, Germanwatch) can be authorised by those affected to bring proceedings on their behalf in German courts to fight for justice and reparation.

The Act sends important signals to countries beyond Germany. Germany is about to have the most ambitious supply chain law in international comparison. This will also encourage legal developments in other countries.

The EU Commission is planning to introduce European legislation on sustainable corporate governance later this year, which will also include mandatory due diligence obligations in global value chains. This is good news because EU-wide legislation increases the effectiveness of the protection of human rights while also creating a level playing field in the internal market. The current patchwork of national and sector-specific EU regulations is not conducive to the cause. For example, some EU countries such as France or the Netherlands already have legislation in place; however, this is not as far-reaching (it only applies to very large companies, for instance, or the range of protected rights is very limited or it only applies to the enterprise’s own business area and not in the entire supply chain).

  • By issuing the national law we have provided an important impulse for an ambitious European legal framework through
  • the relatively generous scope of application (e.g., France from 5,000 employees)
  • the creation of a code of conduct with detailed due diligence obligations in contrast to pure reporting obligations (e.g., UK)
  • robust regulatory control
  • the cross-sectoral approach (i.e. rather than an act for the wood trade, conflict minerals, etc., as is the case in EU legislation or in the U.S.)
  • the wide range of protected legal rights – all human rights are covered, not just the prohibition of child labour (the Netherlands) or forced labour (UK)

The EU’s leg­isla­tive pro­pos­al

A globalised economy requires a European strategy in the form of an action plan to effectively protect human rights in the supply chains of EU companies. The Federal Ministry of Labour and Social Affairs promoted the issue during Germany’s Presidency of the Council of the European Union in 2020; a concrete legislative proposal from the EU Commission is to follow in 2021.