This is another blog in our series of blog posts on Value Chain Sustainability laws.
Germany’s landmark Act on Corporate Due Diligence Obligations in Supply Chains (“Gesetz über die unternehmerischen Sorgfaltspflichten zur Vermeidung von Menschenrechtsverletzungen in Lieferketten”) goes into effect January 1, 2023. It will apply to all companies whose head office, main branch or statutory seat is in Germany, if the company has at least 3,000 employees. As of 2024 it will be extended to companies with more than 1,000 employees.
Focus on Human Rights
The primary purpose of the Act is to protect human rights, generally as listed in international treaties on the protection of human rights. In addition to that general reference, the law prohibits specific human rights violations, to wit:
- Employing a child of 15 years or younger;
- The worst forms of child labor;
- The worst forms of child labor of children under 18 in accordance with the ILO Convention on Worst Forms of Child Labor, 1999 (No. 182);
- Forced labor;
- All forms of slavery or similar practices of domination or oppression at work;
- Disregarding local applicable rules on workplace safety and working conditions if this could lead to workplace accidents or work-related health risks;
- Disregarding freedom of association;
- Employment discrimination;
- Wage discrimination;
- Commissioning or using private or public security forces to protect a business project if, due to a lack of control, the security forces will infringe the prohibition on torture, harm life or limb, or interfere with freedom of association and the right to collective bargaining; and
- Action or inaction that is directly capable of infringing a protected legal interest in a particularly serious manner and whose illegality is obvious, taking into account all circumstances.
The law also has environmental prohibitions:
- Causing harmful changes to the soil, polluting water, polluting air, causing harmful noise emission, or overconsuming water, which severely impairs the natural resources necessary to preserve or produce food, denies access to drinking water, destroys or impedes access to hygiene facilities, or has harmful effects on human health;
- Production of mercury-added products, use of mercury and treatment of mercury waste;
- Production and use of chemicals under the Persistent Organic Pollutants Convention (POP or Stockholm-Convention);
- Export and import of certain hazardous wastes; and
- Prohibition on those who acquire, develop, or otherwise use land, forest, or water from unlawfully evicting persons from or depriving them of the use of such land, forest, or water when those persons are dependent on the land, forest, or water for their livelihood.
Overview of “Due Diligence” Obligations
Under the new law, in-scope companies must monitor human rights and environmental due diligence obligations in their supply chains, to protect human rights.
The law places the following requirements on companies:
- A risk management system;
- An in-house representative for human rights;
- Periodic risk analyses;
- Adoption of human rights policies;
- Preventive measures internally and with respect to direct suppliers;
- Remedial action in the event of a violation of a protected legal position;
- Complaints procedure for notification of human rights violations,:
- Certain due diligence measures with regard to risks associated with indirect suppliers; and
- Documentation and reporting of due diligence obligations.
Duty of Effort
The Act creates a duty of effort, but not a duty of success. It does not require companies to guarantee that human rights violations will always be prevented. However, companies must prove that they have done everything possible to prevent human rights risks in their supply chains. In this context, the principle of adequacy – an undefined legal concept open to interpretation – is of decisive importance, and the following criteria will apply:
- the nature of the company’s business,
- the company’s ability to influence the perpetrator of the human or environmental rights violation,
- the expected severity and/or reversibility of the violation, and the probability that its re-occurrence.
- the contribution to the risk.
Even though the Act primarily applies due diligence obligations to a company’s internal operations and its direct suppliers, misconduct by indirect suppliers can justify the obligation to act as soon as a company has gained substantiated knowledge of possible human rights violations in the supply chain. In these cases, the obligation arises to initiate appropriate measures, i.e., risk analysis and preventive/remedial actions.
Compliance will be assessed based on various factors, such as local laws in third-world countries. A company will need to review its risk analysis and other measures at least once a year.
Risk Management is at the Heart of the Act
The Act requires companies to identify, analyze, prioritize and remediate their internal and supply chain risks. A company must appoint one of its people to be responsible for monitoring risk management.
Based on the findings of the risk analysis, companies must adopt a policy statement and take measures based on it, and management must commit to it.
The Act requires:
- Presentation of the relevant human rights and environmental risks;
- Description of the company’s risk management concept; and
- Explanations of the company’s targets, benchmarks and guidelines (so-called “human rights-related expectations”).
Companies must update their human rights guidelines at least annually.
Importance of a Human Rights Strategy and Preventive Measures
The general principles stated in a company’s human rights strategy must be integrated into everyday business. All business processes must be reviewed on the basis of the human rights strategy and, accordingly, codes of conduct or purchasing guidelines must be established. Furthermore, the human rights strategy must become a binding component of business relationships, by contract or otherwise. In individual cases, the consideration of human rights in business activities can go as far as requiring companies to support their suppliers in preventing risks, e.g., through training or further education with regard to human rights issues.
Human rights violations in the supply chain must be stopped, or at least a plan must be adopted to minimize negative impacts. The Act contemplates that companies may find joint solutions with their supplier(s), resulting in action plans. As a last resort, business relations may be terminated, or a temporary suspension of business relations may be considered.
The Act requires the creation of a complaints system that can be accessed easily by anyone, while safeguarding confidentiality and data protection. The complaints procedure must also be open to persons whose rights are violated by the economic activities of an indirect supplier
The complaints system can either be provided within the company or by using an external service.
Companies must document their compliance and retain the documents for seven years, and issue an annual report on their risk identification and prevention and remedial measures taken.
If a company falls short of what is required, it will run the risk of punitive government action. Depending on the level of infraction, companies may be fined periodically up to €50 Mn. For companies with an annual global turnover of more than €400Mn, a fine up to 2% of annual net turnover can be levied for noncompliance.
Additionally, penalties can include an exclusion from the award of a supply, works or service contract for up to three years.
Companies that violate the Act are not civilly liable.
However, claims under section 823 of the German Civil Code (Bürgerliches Gesetzbuch or BGB) on the grounds of a breach of duty of care and claims under foreign law may be enforceable against German companies that violate human rights.
Moreover, when a person’s “legal interest of paramount importance” protected in one the international agreements listed in the annex to the Supply Chain Due Diligence Act has been violated, that person may authorize a nongovernmental organization (“NGO”) or trade union to sue on his or her behalf. (i.e. “special transfer of procedural authority”).
Value Chain Sustainability Laws in the New Economic World Order
This new German Act is the most significant Value Chain Sustainability law enacted to date anywhere is the world. Notwithstanding that, in a few years its importance will likely be overtaken by the Corporate Sustainability Due Diligence (“CSDD”) Directive presently being finalized in negotiations between the European Council and the European Parliament. Indeed, we can foresee the Act possibly being repealed when CSDD is “transposed” into the laws of the individual Member States of the EU.
In our opinion, Sustainability/ESG is already re-shaping the world economy, and Value Chain Sustainability laws are bringing maturity and disciple to Sustainability/ESG. They create a legal framework – a “level playing field” – for a new economic system that will better serve our planet and its people.
What Companies Need to Do Now
In-scope companies (those that are directly affected by the Act) need to become compliant as soon as possible. Although they will not be in-scope, both direct and indirect suppliers will be under pressure to help their in-scope business partners become compliant – and to show that they will be reliable suppliers.
All this will be a big job, a defensive necessity, but also a great opportunity to generate new business. All these companies should use the next few years to learn how to work within the Act’s rules to be ready for the more stringent rules that will come from CSDD and maybe from new rules enacted by other countries.
Written Dec 27, 2022
© Allen Campbell, JD, MBA