Following France and Norway’s direction, Germany became the third European country to impose due diligence duties on companies with the view to protect human rights across international supply chains earlier this year.

With less than 20% of German companies monitoring their foreign subsidiaries and contractors for human rights violations, according to studies conducted by the European Commission and the German government, it comes as no surprise that Germany has made the decision to move away from voluntary compliance with Corporate Social Responsibility to mandatory compliance.

What is the German Supply Chain Due Diligence Act?

Passed in 2021, the German Supply Chain Due Diligence Act, also referred to as Lieferkettensorgfaltspflichtengesetz or LkSG for short, came into effect on January 1^st 2023. Based on the UN guiding principles, the act provides clear expectations for companies to comply with 15 due diligence regulations, 12 focusing on human rights (i.e., forced labour, child labour, discrimination) and three focusing on occupational safety standards and environmental issues like oil pollution.

Though the focus currently weighs more heavily on human rights and human health, the introduction of the European Supply Chain Directive in the future will see the LkSG being adapted in line with European law to impose stricter regulations concerning environmental issues. Environmental protection is however covered at present in so far as environmental damage that indirectly affects human rights, such as human health or human rights violations.

The act requires businesses to better identify human rights and environmental risks in their supply chain operations. Should businesses identify such issues, they must assess the impact, determine ways to prevent them from occurring again, and ultimately remedy any failures that already exist. As part of this, companies must produce an annual report to highlight the measures they have taken to identify and address risks throughout the supply chain. This annual report must include all products and services offered by the business, and all steps in the production process from the extraction of raw materials through to the delivery of the product to the end-user, both in Germany and overseas.

It’s important to note that LkSG is more concerned with businesses establishing efforts to do better, rather than succeeding at resolving every single issue. What this means is that companies must prove that maximum effort has been made to prevent human rights violations throughout their supply chains, as opposed to expecting businesses to fix everything in one fell swoop.

While these obligations primarily apply to businesses’ direct suppliers and operations, if a business has gained substantial knowledge pointing to possible human rights violations by an indirect supplier, they are obliged to initiate appropriate measures. Additionally, companies must ensure all employees of indirect suppliers have the means to file complaints pertaining to violations of human rights and environmental matters.

At present, the act requires businesses with 3,000+ employees to comply, with the plan that businesses with 1,000+ employees will need to comply from 2024 onwards. Small and medium enterprises that do not meet these compliance requirements, however, will also be expected to focus on certain aspects of the LkSG, as due diligence obligations in contractual relationships is becoming an essential component of supplier contracts.

If businesses fail to comply with the LkSG regulations, they will face fines of up to €8m or 2% of the annual company revenue. The fines system is based on yearly revenue and applies only to enterprises with an annual turnover of more than €400m.