Why the German Supply Chain Due Diligence Act Remains Essential for Global Businesses: A 2024 Guide

 

Whilst, also being the first, the German Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtengesetz), remains the most influential and far reaching attempt to get businesses to examine and carry out due diligence to see if their supply chain is complying with both global environmental and human rights laws.  Through design and its sheer influence, it reaches further, and matters more, than you and your competitors probably think. 

But the business doesn’t operate in Germany, why should they care?

Whilst the act focuses on German based businesses, it’s reach is global, with the German car manufacturing businesses having around 20 percent of the global market, the German pharmaceutical businesses around 15 percent of the global market, and that is without even considering the German Banking sector.

The commercial reality is that, each of these German businesses and their various supply chain tiers will pass down their liabilities and responsibilities, to everyone in their supply chain.

And those liabilities? For those businesses with a turnover greater than €400 million, 2% of their annual, global turnover! Or, if the business turns over less than this, up to €8 million.

Other European countries, and the EU itself are all looking at comparable legislation along with other major countries, with the German legislation very much the shining example and benchmark. 

It is very likely that governments across the globe will feel the pressure and gravitational pull of creating similar or compatible laws

So what does my business need to do to comply?

The starting point is to build, or adapt existing risk management systems, to allow a business to assess if there is a risk that its own activities, or those of its supply chain partners, violate human rights, or environmental laws.

The act defines human rights violations, as “a situation in which there is a sufficient degree of probability based on factual indications that a violation…will occur”.

The need for factual indications is a key component of complying with the legislation and the bedrock of how calculations and assessments of probability can be formed.

Most businesses will turn to their internal ESG teams or consultants, who in turn will go back to source material to be able to demonstrate existing factual indicators, to build their risk assessment and probabilities upon. 

This is an inherently time consuming, labour intensive exercise and time will often not be on the business’s side. Systems for gathering and processing factual indicators will need to allow for the introduction of new and updated data.

But what if the businesses don’t have enough data on individual suppliers?

Factual indicators may not always exist for a specific supplier, or series of suppliers in one area, and it is acceptable to use location based information. 

As long as it is based on factual indicators, it is possible to use this location based information to judge whether a violation might occur.

The German Supply Chain Due Diligence Act still the standard to follow

The German Supply Chain Due Diligence Act isn’t going away for global businesses, and if anything, it is more likely to be joined by comparable and complementary legislation, covering even more of the globe.

Ensuring your business, or those that you advise have risk management systems in place, which allows the probability of a violation to be measured from factual indicators is crucial.

About the author

Tim Shutler, COO of 7 Satya

Tim Shutler, COO of 7 Satya