On 17 July 2021, the Act on Corporate Due Diligence to Prevent Human Rights Violations in Supply Chains (only in German) was passed in the German Bundestag.
The law will take effect from 1 January 2023 for companies based in Germany that employ at least 3,000 people. Pursuant to § 1(2) and (3) LkSG, this also includes temporary workers (after a period of employment of 6 months) and employees (employed in Germany) from affiliated companies. From 1 January 2024, the obligations will be extended to companies with at least 1,000 employees.
We already reported on this in a previous news item. In this text, we go into the details of the requirements from the LkSG and the new developments at the European level.
What due diligence obligations do affected companies now have to reckon with?
§ 2 of the Act contains a colourful bouquet of duties of care to be observed, distributed among §§ 3–10 LkSG. § 3 LkSG requires affected companies to observe human rights and environmental due diligence obligations in their supply chains. Of particular relevance to affected companies are the following due diligence requirements, which are structured in stages: from risk identification to prevention and reaction in the event of a violation, right through to documentation requirements:
§ 4 LkSG requires companies to establish a risk management system, which includes, for example, the appointment of a human rights officer. This risk management must be appropriate and effective to meet the due diligence requirements of § 3 LkSG and must also be embedded in all relevant business processes.
As part of this risk management, § 5 LkSG also requires companies to conduct a risk analysis (at least annually), the implementation of which requires, among other things, the weighting and prioritisation of human rights and environmental risks.
§ 6 LkSG then requires the implementation of appropriate preventive measures in the event a company identifies a corresponding risk after a risk analysis has been carried out. As a preventive measure, for example, Paragraph 2 mentions the issuance of a human rights strategy, which must describe the procedure by which the company will fulfill the obligations mentioned therein.
If the company identifies a violation of a human-rights-related or environmental obligation, it must take remedial action as defined in § 7 LkSG. In the event the violation is committed by a direct supplier, termination of the business relationship might even be a suitable remedy as a last resort.
In addition, it is incumbent on companies to set up an internal complaints procedure that enables individuals to point out relevant risks and violations (§ 8 LkSG). This complaint procedure must be designed in such a way that indications of risks and violations caused by the financial actions of an indirect supplier are also received.
Finally, § 10 LkSG requires companies to document their due diligence obligations on an ongoing basis and to submit an annual report on the fulfillment of these obligations. The latter must be made publicly available free of charge on the company’s website for a period of seven years.
Implications for affected companies – adaptation of the contractual landscape
Compliance with the measures provided for in the Supply Chain Act will (have to) be implemented in particular through appropriate agreements in the supply chain. What this contractual arrangement will look like in detail depends on several factors, ultimately to a large extent on the respective structure of companies’ supply chains.
It is conceivable to agree on and/or expand a “code of conduct” within the framework of the supplier agreements, with which the respective requirements and expectations of companies towards suppliers are described in a binding fashion. The (indirect) transfer of supply chain requirements to the downstream supply chain may also be required at the contractual level from an direct supplier. It is also possible to create damage compensation claims or termination options at the contractual level in the event of non-compliance with supply-chain-specific requirements. This is all the more true since the LkSG does not establish its own liability standard. To the contrary, § 3(3) LkSG stipulates that a breach of the obligations under the Act does not give rise to civil liability.
Development at European level
Not only at the national level, but also at the European level, there is a struggle surrounding corporate due diligence. As recently as March 2021, MEPs adopted a legislative proposal on corporate accountability and due diligence by a large majority and called on the EU Commission to submit a corresponding proposal for a directive. People are still waiting for such a proposal from the EU Commission. The release was originally announced for June, but has been pushed back to October. Whether this deadline will be kept remains to be seen. One reason for the delay may be the fact that the EU Commission is currently working on two different “supply chain laws”: in addition to a European supply chain law on corporate due diligence and accountability, also a law for a deforestation-free supply chain.
The impact of such a due diligence law at the European level for the companies affected in accordance with the German LkSG will ultimately depend on whether and to what extent a corresponding directive goes beyond the requirements of the national law. It thus remains to be seen how things will develop. For example, at variance with the provisions of the German LkSG, in addition to a broader scope of due diligence (according to which not only human rights and environmental risks but also negative impacts on good governance are to be reviewed), a broader scope of application is also being discussed, i.e. one that covers small or medium-sized enterprises in certain sectors.
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