In the previous article, the “United Nations Guiding Principles on Business and Human Rights”, created in 2011 and which still influences several laws in many countries, was highlighted.
Today, the highlight is on the German Supply Chain Due Diligence Act (LkSG or Lieferkettensorgfaltspflichtengesetz) which was notably influenced by said United Nations document.
Indeed, the LkSG was approved by the German parliament (Bundestag) on June 11, 2021, effective from January 1, 2023, aiming to improve the international human rights and the environmental scenario. The Act establishes the requirements for the responsible management of supply chains, implementing the necessary due diligence according to the company’s capacity or the branch in which it operates.
Establishing the requirements above provides for the creation of processes to identify, assess, prevent, and remedy risks and impacts related to the environment and human rights, both in their supply chains and operations. Such processes must also ensure that employees of indirect suppliers, i.e., suppliers with whom the company has no direct commercial relationship, can file complaints, alerting the company to potential human rights-related or environment-related violations.
Companies must publish an annual report describing implemented due diligence measures, the identification of risks, and the preventive and remedial measures adopted to mitigate such risks, in addition to maintaining such documents for a period of 7 years. The risks to which the act regards and which must be identified are listed below:
1. Forced labor
2. Child labor
4. Violations of freedom of association
5. Unethical employment
6. Unsafe working conditions
7. Environmental degradation
This act is now imposed only onto companies with at least 3 thousand employees in Germany. However, as of January 1, 2024, every company with at least a thousand employees will also be included. Although small and medium-sized companies are outside the requirement, they should worry about the LkSG given that, when providing services or supplying goods to large companies, they must sign contracts adjusted in accordance with the act.
Companies included in the above criteria that do not comply with the act may be fined up to €400 million or up to 2% of their average global annual turnover, in addition to the possibility of not being able to enter into contracts with the German government for a period of up to 3 years, whilst individuals will be subject to fines of up to €800,000.00.
Note that the act does not penalize a company simply because there has been a violation as per one of the 7 risks listed above, but rather for inertia or failure to adopt processes to identify, assess, prevent, and remedy the environmental and human rights risks in their supply chains and operations.
Regarding due diligence, it should be based on the following criteria:
1. the nature and scope of the company's business
2. the company's ability to influence the direct cause of a human rights-related or environmental-related risk or the violation of a human rights-related or environmental-related duty
3. the expected severity of a violation, the ability to mitigate the violation, and the likelihood of the violation of a human rights-related or environmental obligation
4. the nature of the company's contribution to human rights or environmental risks or the violation of human rights or environmental obligation
Within the criteria listed above, which guide how deep the due diligence must be, the following topics that must be investigated in the due diligence process are established :
1. Identifying risks and implementing risk analysis relating to own activities and business relationships within the supply chain
2. Implementing and communicating a human rights strategy and preventive measures
3. Considering the human rights strategy and preventive measures in business activities and monitoring of compliance
4. Taking remedial action, establishing a concept to minimize human rights violations, and suspending the business relationship, if necessary
5. Implementing and maintaining a reporting system and subsequent review
6. Information duties
The Federal Office of Economics and Export Control in Germany was tasked with monitoring companies' compliance with the LkSG. During its audits, a risk-based approach is followed, whose typical criteria for assessment are factual and regulatory conditions at the production site, such as discrimination against ethnic minorities or slave labor in rural enterprises.
Therefore, top-level management and the compliance officer should be very careful when applying the LkSG, because, given that fines may reach individuals, they can be held responsible for inertia or failure to implement the processes determined by the act.