The new supply chain due diligence law - what is in store for us at European and German level?
Social and economic development is moving in one direction: more sustainable, more social, more ecological. Even without a new law, corporate sustainability is scrupulously observed - at least externally. Misconduct can damage the company's reputation and thus its development. However, it becomes problematic if rules are not clearly defined and are vague - the major weakness of the LkSG. The challenge will be to analyze one's own supply chains individually and, above all, to adapt to the changes in good time.In Germany
From 2023, the LkSG will affect partnerships and corporations under German and foreign law that are based in Germany and also have more than 3,000 employees. This includes more than 600 companies. From 2024, companies with more than 1,000 employees (2,891 companies) will also be affected. The due diligence requirements set out in the law include establishing a risk management system and conducting a risk analysis, adopting a policy statement of corporate human rights strategy and enshrining preventive measures. These must be implemented by the companies. In addition, there is a documentation and reporting obligation for the fulfillment of due diligence obligations, which will result in higher bureaucratic costs for many companies. Implementation is monitored by the BAFA (Federal Office of Economics and Export Control), and non-compliance can result in fines of up to 800,000 euros. Depending on the size of the company, the fines can even go as high as two percent of global sales. According to the German Federal Ministry of Labor and Social Affairs, this results in an estimated increase in annual compliance costs for industry of around 43.47 million euros. Due to this, around EUR 15.14 million is attributable to bureaucratic costs. Small and medium-sized enterprises will not be directly affected by the project. However, indirect effects are to be expected in the supply chains.
In Europe
At the European level, the EU Supply Chain Directive, a Commission draft, was published on February 23, 2022. Initially, this will have no immediate effect on member states, as it must first be approved by the European Parliament and Council as a next step. This is expected to happen this year, one can typically expect the draft to be watered down. In its current version, however, the directive would lead to a tightening compared to the German law. This is because the scope not only covers the protection of human rights, but also includes environmental and climate protection. Here, the directive is based on international treaties such as the Paris Climate Agreement. The scope of application will also be narrower. Companies with 500 or more employees and net sales of 150 million euros would be affected. In the case of companies that generate 50% of their sales in the food, raw materials or textile sectors, which are considered particularly critical, the directive will already apply from 250 employees and net sales of 40 million euros. In the event of a violation, the directive leaves the amount of the fine in the hands of the member states. However, it does provide for the possibility of civil actions and thus the payment of damages.
Conclusion
In order to escape sanctions, both at the federal and European level, it is important to prepare early. First, the company must be aware of whether it is affected by the LkSG and thus determine the individual need for action. To keep a constant eye on the obligations, a reporting and risk management system should be implemented and communicated within the enterprise. This helps to counteract a bureaucratic jungle at an early stage. A next step can be the appointment of a human rights officer who monitors the supply chains in cooperation with the CSO. Supply chain visibility should be made an issue throughout the company.
In summary, implementing the LkGS will be a challenge for all companies. Even smaller corporations will be affected by higher supply costs, etc. In the end, almost every company is part of a supply chain and will face requirements from a customer or supplier. The important thing is to seize the momentum now. Early preparation, even for smaller companies and startups, is essential. It is true: The momentum for Supply Chain Visibility is now!
BECEPTUM is happy to support you in the implementation!
