The German Due Diligence Act, also known as the Lieferkettensorgfaltspflichtengesetz, was adopted by the Bundestag in June 2021 and comes into force from 1 January 2023. The new legislation requires major businesses in Germany to carry out an internal analysis of their operations, introduce preventative measures, and establish an effective complaints mechanism to combat modern slavery risks in their global supply chains.
The new legislation means companies of a certain size with ties to Germany must establish robust due diligence procedures to prevent human rights and environmental abuses within their own business activities and third-party supply chains. In light of the recent adoption, we have identified the most frequently asked questions to highlight the changes and how the Lieferkettengesetz may impact your business.
Human rights and environmental risks
The International Labour Organisation estimates roughly up to $150 billion is generated each year in slavery-derived profits globally. In Germany, over 167,000 people are identified as ‘in a state of modern slavery’. Comparatively, 2016 there were over 375 police investigations completed, resulting in an identified 550 victims. Research shows that Germany is at an increased risk of modern slavery, specifically sexual exploitation.
Due to its universal illegality, modern slavery is often hidden from sight and consumer consciousness, but more people are enslaved today than at any other time in history. Both adults and children can be found working in forced labour conditions in industries such as manufacturing, agriculture, mining, fishing, construction, food processing, and domestic services. Therefore, the Germany adopted the Lieferkettensorgfaltspflichtengesetz to improve the global human rights situation along supply chains and make globalisation socially responsible with a view to the 2030 Agenda for Sustainable Development.
How is the world effected by human rights risk?
Forced labor, child labor and human trafficking are types of modern slavery, the severe exploitation of other people for commercial gain. Millions of adults and children are afflicted in every country of the world. It is all around us, but often just out of sight. People can become entrapped in making our clothes, serving our food, picking our crops, working in factories, or working in houses as cooks, cleaners, and nannies. Victims of modern slavery may appear from the outside to be working a regular job but behind closed doors, they are at significantly higher risk of serious long term health impacts.
Some indicators include multiple injuries occurring over a long period of time, sexually transmitted infections, disordered eating or poor nutrition, evidence of self-harm, or significant fatigue. The psychiatric or psychological distress of victims can manifest in a variety of ways but the sentiment is the same; these individuals face horrific traumas in their everyday life. Ensuring companies are held accountable, as well as those that operate within their respective supply chains, is one small step in ensuring vulnerable workers are protected.
What human rights and environmental risks could be in your supply chain?
Human rights and environmental risks are present in different forms and can affect supply chains in various ways. People working in global supply chains often suffer serious labour rights abuses. It can appear just like a normal job, but when you peel back the curtain, you can see the level of control some businesses have over their employees. Adults and children alike can face violence or threats, be forced into inescapable debt, have their passports taken away or be threatened with deportation. Additionally, if the workers work in a hazardous environment, it can cause various health issues such as exposure to dust, fumes, radiation and loud noise. Chemicals such as lead, mercury, arsenic and so on can also cause various diseases.
Extreme weather poses a great danger to the smooth functioning of supply chains. Earthquakes, floods, extreme hot and cold temperatures can make it difficult to transport the materials through the supply chain and halt operations. Excessive and wrongful extraction of raw materials can also have negative results. Companies can face legal actions from the government, NGOs, or local communities impacted by the supply chain. When companies neglect environmental risk or human rights infringements, the consequences can be dire. Companies can significantly reduce the risk of human rights violations in their supply chains by identifying where the risks are and taking steps to address them. Under the German Due Diligence Act, companies will be required to publicly report on such efforts.
What is the German Due Diligence Act?
The Lieferkettengesetz legislation also referred to as “Lieferkettensorgfaltspflichtengesetz”, is a bill to uphold the rights of potentially exploited people and the environment within complex, multi-tiered supply chains.
When does it go into effect?
The German Due Diligence Act’s new compliance and enforcement law initially requires companies with their central administration, their principal place of business, principal place of business, their administrative headquarters or their statutory seat in Germany and employing at least 3,000 employees (more than 900 companies) to begin streamlining their enforcement functions by 2023 – with the expectation that companies with at least 1,000 employees (currently approx. 3,900 companies) will follow suit in 2024.
Will SMEs also be affected by these changes?
The act will affect more than just large employers. SMEs within larger company’s supply chains may need to make operational changes. This is because large employers who are subject to the legislation will be required to ensure that companies within their supply chains are also compliant with the requirements of the act on an ongoing basis.
What must companies in Germany do to meet the new regulation?
Companies need to exercise due regard for the human rights and environment-related due diligence obligations in their supply chains with the aim of preventing or minimising any human rights or environment-related risks or of ending the violation of human rights-related or environment-related obligations (see Section 3 – (1) of the Lieferkettengesetz).
Specifically, companies that are within the act’s parameters will need to take the appropriate measures to prevent potential adverse impacts in the following three areas:
- Human rights, including social, trade union, and labour rights;
- Good Governance, including combating bribery, corruption, and illegal campaign contributions;
- Environment, for example, the production of waste, sustainable use of natural resources, pollution, greenhouse gas emissions, deforestation, biodiversity, and ecosystems.
To successfully reduce their impact in these areas, the act requires companies to establish a process to implement the following practices:
- Establish a risk management system
- Designate a responsible person or persons within the enterprise
- Perform regular risk analyses
- Issue a policy statement
- Establish preventive measures within the company’s own business unit and vis- a- vis direct suppliers.
- Take remedial action
- Establish a complaints procedure
- Implement Due diligence obligations with regard to risks at indirect suppliers, and
- Document and report on these actions.
To learn more about the above requirements and how your company’s policies currently stack up, take our Modern Slavery Questionnaire or contact us to learn how ethiXbase can help you effectively assess the risks throughout your supply chain.
Do companies have to appoint a Menschenrechtbeauftragter (Human Rights Officer)?
The enterprise will need to appoint a person or persons to govern as such. With proper risk analysis tools in place, this process can be managed by internal team members.
How will this law interact with the draft European Directive?
Similarly to the German Due Diligence Act, it is anticipated that the European Directive aims to introduce far-reaching mandatory due diligence obligations addressing the potential negative impacts of globalised business activities in various fields of corporate responsibility.
How can businesses impacted by the act get started?
At ethiXbase, we constantly monitor legislative developments so we can help businesses like yours stay ahead of the curve. Created in collaboration with leading law firm, Norton Rose Fullbright, the ethiXbase Modern Slavery Questionnaire and risk assessment programme is the first step in gathering the information required to effectively assess such risks throughout supply chains. We use this to provide actionable analytics enabling you to target and manage key risks and establish key reporting mechanisms.
Does ethiXbase have a Supplier Risk Management tool?
Our market-leading ethiXbase 360 platform contains a series of interconnected modules creating a configurable, end to end third-party compliance solution to support every aspect of Supplier Risk Management. Our advanced due diligence and risk-based screenings product have been designed to address the requirements of the German Due Diligence Act.
How does ethixbase’s 360 platform manage the risks outlined in the German Due Diligence Act?
The German Supply Chain Due Diligence Act requires companies to identify and assess human rights and environmental risks within their business and third-party supply chains, and to establish an effective risk management system. The ethiXbase 360 platform is a modular, end to end, solution for clients to manage the full life cycle of third party risk management.
Our platform includes onboarding third party suppliers, assessing initial risks, risk-based screening and diligence, and ongoing monitoring. Specifically, ethiXbase’s risk screenings and due diligence scan supply chains for human rights issues, modern slavery, poor labour practices, child labour, forced labour, environmental practices, health and safety, bribery and corruption and more.
“Establishing an effective risk management system will be key to meeting the requirements of the Lieferkettengesetz. At ethiXbase, our market-leading ethiXbase 360 platform contains a series of interconnected modules creating a configurable, end-to-end third-party compliance solution that conducts the necessary human rights and environmental due diligence for German businesses and their supply chains – so they can stay ahead of the game.” Hartmut Dech, Business Development Director, ethiXbase Germany
To learn more about how we can help you meet the German Due Diligence or to request a free demo of our Modern Slavery risk assessment programme and third-party risk management platform, please get in touch at email@example.com