Mixed Reception to New German Due Diligence Act

In early 2021, Germany drafted its much anticipated Due Diligence Act (also known as the Lieferkettengesetz), targeting human rights and environmental standards in global supply chains, which was met with a largely enthusiastic reception in Germany and in the EU.

Among a range of much-anticipated provisions, the law calls on large companies in Germany to assume responsibility for identifying human rights and environmental risks within their supply chains. The Act applies initially to German companies with more than 3000 employees, though it could potentially be extended to companies with more 1000 employees. We summarised the new legislation in this post.

There is general agreement that the new law is a significant and welcome step forward in efforts to protect the environment and address the exploitation of people in complex, multi-tiered supply chains.

The onus has now been placed on companies to identify any such risks that may exist in their extended supply chains, take measures to correct them, and document the steps they are taking with the Federal Office for Economic Affairs and Export Control (BAFA). If companies violate their due diligence obligations, BAFA will be able to issue hefty fines. Affected parties can also demand that BAFA takes further action. Nonetheless, various German entities are pressing for continued enhancements.

Debate Over Provisions Continues

The ambitious compliance and enforcement mechanisms that comprise the new legislation have been long sought – and hotly debated – by an array of parties, ranging from three ministries within the federal government to business groups, civil organisations and NGOs.

Want to learn more? Watch the recording of our recent webinar: Preparing for the German Due Diligence Act, a roundtable hosted by ethiXbase in collaboration with the Deutsches Institut Für Compliance (DICO).

The law was spurred into existence following serious incidents in recent years in which German companies, through their international business activities, had been directly or indirectly involved in cases of unsafe factories, exploitative child labour, and deforestation. The law refers to the UN Guiding Principles on Business and Human Rights, which are among the most important internationally recognised standards of corporate responsibility for human rights.

Its drafting has been seen as further progress under the United Nations Global Compact, calling for responsible, collaborative business practices that align an organisation’s bottom-line and environmental, social and governance practices with global efforts.

On one hand, the law is credited with being an urgently needed paradigm shift. The law’s preventive influence, strong regulatory oversight and enforcement are seen as formidable tools in bringing an end to human rights violations and environmental degradation in corporate supply chains.

However, non-governmental factions across civil society are calling for urgent improvements from parliament to eliminate weaknesses and ensure the law is more in line with international standards and efforts at the EU level. A joint statement by more than 50 German companies in April, in response to the law when it was still in discussions, called for improvements in key areas.

Concerns over the law that ultimately passed have been enumerated by the German Supply Chain Law Initiative. Among the criticisms are that obligations under the law apply only to a company’s own business operations and direct suppliers but are less comprehensive in monitoring indirect suppliers. The analysis also claims the law treats environmental aspects only marginally and falls short in providing for civil action against companies that fail to comply.

Looking Ahead

Upon announcement of the law’s passage, Johanna Kusch, coordinator of the civil society alliance “Initiative Lieferkettengesetz” commented: “In the fight against human rights violations and environmental destruction in supply chains, we are still far from reaching our goal, but as of today, we are finally at the starting line: for the first time, a law in this country obliges companies to take responsibility for the people in their supply chains.”

Kusch added: “Therefore, this law is only a partial success. Civil society will continue to fight for human rights and environmental protection in the entire value chain: For improvements in the Supply Chain Act, for an effective implementation and for a Europe-wide legislation that goes beyond the German law at crucial points.”

Non-governmental bodies are expected to continue to press for numerous expansions of the law, calling for more companies to be under obligation, reductions in the exceptions to the requirements, and for improvements to the right to compensation for injured parties.

Clearly, much will remain fluid as the Lieferkettengesetz is rolled out. For now, companies in and outside of Germany can be expected to place increasing emphasis on their domestic and foreign due diligence status.

Do you want to learn about how ethiXbase can help you meet the new German Due Diligence Act? Take 10 minutes to watch this video about the ethiXbase 360 Third-Party Risk Management Platform and find out how the EB360 solution can resolve due diligence risk in your supply chain.

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