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Supply Chain Due Diligence Act: German Companies must act now

Julia Bernert

Published on 09.06.2023

The German Supply Chain Due Diligence Act (SCDDA) has been in force since the first of January this year. But German companies – including those in the promotional products industry – are still not sufficiently prepared for it. An overview.

The globalization of economic cycles has led to a situation in which around 80 percent of world trade is now based on global value chains. Over 450 million people depend on these chains. However, many products and raw materials are produced or mined under conditions that are intolerable for both the environment and workers.

For example, a T-shirt today travels about 18,000 kilometers before it reaches the store. This is not only ecologically questionable. The wages paid to the seamstress of a brand-name shirt, for example, amount to only 0.6 percent of the retail price. At the same time, there is a human being at the beginning of every supply chain.

Sensible goal, controversial implementation
This is the background against which the development of the German Supply Chain Due Diligence Act (SCDDA), which came into force in January, must be considered. It initially applies across all industries to companies with 3,000 or more employees. From the first of January 2024, it will also affect companies with 1,000 employees and more.

The law is intended to improve the protection of human rights along global supply chains. Specifically, it is intended to guarantee compliance with internationally recognized social standards, prevent child and forced labor, and ban substances that are hazardous to people and the environment. The due diligence obligations of companies extend to their entire supply chain – from raw materials to finished products. The requirements are graded according to the companies’ ability to exert influence.

Regular risk analyses of the company itself and its direct suppliers are mandatory. In the case of indirect suppliers, due diligence only applies on an ad hoc basis. Here, companies only have to investigate and take action if they learn of human rights violations. The fact that politicians delegate responsibility for implementation to business is controversial. Particularly because this can also be to the detriment of the end consumer, in the form of price increases. These can be a result of restructuring in companies or changes in the supply chain.

Making use of support offers
The German Federal Office of Economics and Export Control (BAFA) monitors compliance with the law. This is based on an annual reporting procedure and sanctions violations. To this end, the questionnaire drawn up by BAFA must be completed, resubmitted and published every year.

Take advantage of support offers
The Federal Office for Economic Affairs and Export Control (BAFA) monitors compliance with the law. This is based on an annual reporting procedure and sanctions violations. For this purpose, the questionnaire drawn up by BAFA must be completed, resubmitted and published every year.

However, the Act does not create any new civil liability rules. Civil liability under German and foreign law continues to apply. This means that foreign victims can sue for damages in German courts. However, the law of the country in which the damage occurred is applied.

BAFA and BMAS (Federal Ministry of Labour and Social Affairs) offer extensive support services for the implementation of due diligence obligations for companies, which are constantly updated. These should be used when questions arise.

European supply chain directive even stricter
The draft of an European supply chain law presented at the end of February 2022 goes even further than the German legislation in many points. It stipulates that due diligence obligations should already apply to companies with 500 employees and an annual net turnover of 150 million euros. In high-risk sectors such as the textile and food industries, companies with 250 or more employees and sales of 40 million euros are already affected, according to the draft.

The vote on the European Supply Chain Directive is scheduled to take place in the plenary session of the European Parliament in summer 2023. Current developments show that the Parliament’s position will significantly tighten the Commission’s proposal. The Commission’s proposal already goes beyond the German Supply Chain Due Diligence Act in many respects and will present companies with significant additional challenges.

The German industry has expressed criticism
Since the start of the legislative process, massive criticism has been voiced time and again – including from the promotional products industry. The fear is that it will have an impact on small and medium-sized enterprises. This is because SMEs can also be obliged to comply with certain standards through their contractual relationship. Critics see this as an inadmissible shifting of defined obligations onto contractual partners. And yet small and medium-sized enterprises (SME) have already been obligated to comply for a long time.

The “United Nations Guiding Principles on Business and Human Rights” and (in Germany) the “National Action Plan on Business and Human Rights” (NAP) apply to companies of all sizes. Industry associations criticize the fact that companies are expected to review the entire supply chain beyond their own business area. This can mean a considerable amount of additional bureaucratic and financial work.

The larger a company’s circle of suppliers, the greater the burdens that companies can no longer cope with. This is particularly true if companies discover a case of human rights violation in their own business area. In this case, they must take immediate remedial action, which must lead to an end to the violation.

If violations become known at the immediate supplier, the company must draw up a concrete plan to minimize and prevent the abuses if it cannot remedy them in the foreseeable future. As a result, calls include limiting due diligence to direct suppliers and more external support.

Delayed application achieved
The Federation of German Wholesale, Foreign Trade and Services (BGA), together with other leading German business associations, has exerted considerable pressure on the German government to amend or suspend the German Supply Chain Due Diligence Act. At least it has been possible to achieve a slower application of the law. The implementation of some due diligence obligations has thus been postponed.

By June 1, 2024, an assessment will be made as to whether the reporting obligations for the fiscal year that has elapsed by then have been fulfilled. BAFA has announced that it will audit compliance with the Supply Chain Act with a minimum of bureaucracy and a sense of proportion. This also includes taking into account the additional burden on companies in the first year of the audit in line with the principle of reasonableness.

In view of the current political situation and unstable supply chains, the start of the law in Germany should be as application- and enforcement-friendly as possible – particularly with regard to the reporting obligation. Thus, the questionnaire contains over 400 response options. In the interest of users, the BGA hopes for a revision.

Law as an impetus for action
In the current debate, it is not only the competitive disadvantages of affected companies that are being pointed out. There is a broad consensus in the industry that the reporting obligation brings explosive issues in the sustainability debate into focus. After all, as a result of the German SCDDA and the European Supply Chain Directive, companies must address the issues of human rights, environmental risks and corporate responsibility.

In this context, a study* has delivered an interesting result: When asked what motivates companies to consider human rights and environmental risks along their supply chains in the first place, as many as 56 percent of respondents answered that they were only acting in response to legal constraints.

Supply chains not very transparent
This study on the implementation of the law in German companies shows that most companies do not yet feel well prepared. Although the law has been in force since the beginning of the year, only around four percent of the companies surveyed said they were very well prepared for it at the organizational level. In contrast, 70 percent consider themselves to be moderately to very poorly prepared.

Although the data is from January, it conveys how companies are responding to the issue of human rights and the requirements formulated in the law. According to author Jan Wiese from the German Broadcasting Corporation of Berlin-Brandenburg (rbb), it is “sobering” that only 13 percent of companies with more than 1,000 employees are fully transparent when it comes to risks such as possible human rights violations among their direct business partners.

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