On the 1st of January 2023, a new German Supply Chain Due Diligence Act will come into force. This act will bring about some significant changes to how supply chains are managed in Germany. In this blog post, we will look at what businesses need to know about the new Supply Chain Act discuss the key changes that are being introduced and explain how businesses can leverage supply chain software to help prepare for the legislation.
What is the new law?
The new Supply Chain Act is a piece of legislation that will come into force in Germany on 1st January 2023. This law covers a wide range of aspects related to responsible supply chain management practices, ensuring large companies based in Germany observe appropriate social and environmental standards.
The guidance provides a compatible legal framework that is based on the UN Guiding Principles, which will be adapted into future European regulations.
The government of Germany decided that companies must do human rights due diligence in 2016. This means that companies must take steps to make sure that they are not harming people throughout supply chain activity. The government wanted at least 50% of all companies to do this by 2020, but surveys showed that only 17-19% were meeting the desired requirements. So, the government decided that there needed to be a law that makes human rights due diligence mandatory.
What are the key changes being introduced?
One of the key changes being introduced under the German Supply Chain Act is a new requirement for businesses to implement supply chain risk management practices within internal and direct supplier operations. These risk management practices will include regular audits of suppliers to identify risks including forced labour, child labour, discrimination, and unethical employment. Organisations will also need to produce an annual report highlighting the steps they have taken to identify and mitigate such risks.
Overall, the Supply Chain Act presents some significant changes to how supply chains managed by German based businesses should operate. To prepare for these changes, companies should take steps to assess and improve their supply chain risk management practices.
Who will the German Supply Chain Act apply to?
The Supply Chain Act will apply to all companies based in Germany or with a branch office in Germany that employs more than 3,000 employees. The calculation of the size of the company is dependent on the number of employees of all affiliated companies. On January 1, 2024, the Act will extend to companies with head offices or branches in Germany with 1,000 or more employees.
What are companies required to do?
Companies that this affects will have to look at their supply chains. They need to find and fix risks related to how the organisation affects people and the environment. This is according to the UN Guiding Principles on Business and Human Rights.
The companies will also need to create a system to manage risks. And when they discover a risk, they will need to take appropriate action.
Key requirements
- Embed or leverage a risk management system that examines business operations and direct suppliers for human rights impacts.
- Generate policies and procedures to ensure effective management and governance. They should cover topics such as supplier code of conduct, Human Rights, due diligence (in line with supply chain due diligence expectations), complaints procedures and grievance mechanisms.
- Prevent any potential human rights violations within the company’s business unit by establish control measures to verify compliance with direct suppliers.
- Every year, give clear and concise documentation on any activities that were disclosed to the public.
- Generate an annual report to provide an overview of the risks identified by the company and how it handles its due diligence obligations, including measures taken in response to complaints.
What are the penalties for non-compliance?
If a company does not meet the due diligence requirements set forth in the German Supply Chain Act, BAFA is authorised to administratively penalise them through fines including:
- Periodic penalty payments of up to EUR 50,000 in administrative enforcement proceedings and/or fines
- The fines can amount to up to EUR 8 million or 2% of a company’s global revenue
Additionally, companies may be excluded from public procurement procedures for a maximum of three years.
How can supply chain software help to meet German Supply Chain Act requirements?
Implementing a range of supply chain software tools can help businesses to conduct environmental and social due diligence by:
- Mapping supply chains to identify direct and indirect suppliers through the tiers for full visibility
- Leveraging supplier location reports to pinpoint countries more vulnerable to risks
- Conducting digital audits to benchmark supplier risk across a range of issues
- Sharing and requesting modern slavery, sustainability and human rights policies with and from suppliers centrally to maintain standards
- Automating supplier certification assurance status checks against key global schemes including Sedex
- Transforming disjointed supply chain data and transforming it into actionable insight via dashboards to act on risks
To find out how leading brands are using the Authenticate platform to conduct due diligence and mitigate risk, simply get in touch with the team to request a demo.
The Supply Chain Act will bring significant changes to how businesses in Germany operate, with new requirements for risk management and compliance processes. Businesses should take steps now to assess and improve their practices, and ensure they are ready for the January 1, 2023, deadline. By preparing carefully and addressing any potential risks head-on, companies can successfully navigate these changes and continue operating smoothly within Germany and beyond.