Gain for sustainability or red tape? What the new German Supply Chain Act means in practice
BERLIN - Environmental and human rights standards are crucial for a sustainable business cycle - but all of them are almost worthless if their implementation is not enforced. As a European latecomer, the Federal Republic of Germany is therefore now also introducing a far-reaching law that imposes far-reaching new due diligence obligations on companies under certain conditions.
Behind the unwieldy title "Supply Chain Sourcing Obligations Act" - LkSG for short - lies a real big thing. There was a long and controversial public debate about the pros and cons, and on the initiative of the Federal Ministry for Economic Cooperation and Development it was finally passed in the last legislative period.
Its purpose is to require large companies to enforce compliance with human rights and environmental standards, based on the UN Guiding Principles, among their suppliers.
Extensive obligations for larger companies
To this end, the companies concerned must install a comprehensive compliance system that includes close monitoring on the one hand and clear consequences – even discontinuing of the business relation - in the event of violations on the other.
The LkSG will come into force in two stages. From 1 January 2023, it will affect all companies - provided that their registered office or main branch is in Germany - with more than 3000 employees, and one year later all companies with more than 1000.
The first requirement is an annual review of all direct suppliers (relevant here means that there is a high degree of influence on these suppliers) for indications of violations of those standards; if such indications arise during the business year, they must lead to an immediate review.
A complex mixture of factors, country and product risks, media reports, contract design and much more has to be taken into account - the law is naturally not that specific; clarity will be provided in the future by case law through precedent decisions.
In the end, the decisive factor is that it is verifiable and comprehensible that appropriate risk management has been and is being carried out - it is the overall package that counts.
Administration relies on consistent, focussed control and high penalties
The evaluation of this overall package is the responsibility of the Federal Office of Economics and Export Control (BAFA), to which reports will have to be submitted annually. In principle, the BAFA will look at all reports but will place a special focus on critical sectors - which will clearly include commodity-related sectors such as the metal industry.
If due diligence obligations are not fulfilled and, in the worst case, a violation by a supplier is found in this context, this can lead to extremely severe penalties, up to eight million euros or two percent of the annual turnover represent the extremely severe penalty range. This also refutes frequent criticism that the law is too lax and a "toothless tiger".
Concern about excessive bureaucracy
On the other hand, the great concern about excessive bureaucracy in companies, which goes hand in hand with the documentation obligations, has not been refuted. It is not without reason that renowned commercial law firms are currently intensively dealing with the topic, sensing a large market for services there - an indicator of the magnitude of the costs that are now assumed.
Opportunity for modern supply chains - not only in affected companies
Nevertheless, it can be assumed that best practices - also in connection with possible precedents - will develop over time and the handling of the new rules will settle down. The companies currently in the relevant size range could well fulfill the function of a test balloon - it is by no means ruled out that the law will be extended to small and medium-sized companies if the politicians want to have decided by mid-2024 - i.e. still in this legislative period.
Not only against this background is it recommended for very many companies to deal intensively with the topic - quite independently of this, more transparency in the supply chain also leads to a better overview of existing or potential risks. This is - especially in uncertain times - the basis for secure and stable supply chains.
On Metalshub's agenda
If one looks at this factor, the image of the LkSG as purely a red tape is put into perspective, and instead reveals that it is also an opportunity - albeit perhaps a thorny one at the beginning - to usher in a new era of sustainable, transparent and thus increasingly resilient supply chains.
This is exactly part of the Metalshub vision - which is why we have also put the LkSG and its consequences on our agenda. As a strong partner, we also want to be the contact for our customers in this regard and contribute our expertise in supply chain matters. So that you don't have to worry about compliance problems, unsafe supply chains, and violations of the law in the future, but can concentrate on what matters: moving the industry forward with your products!
We have summarised further information on the LkSG for you in detailed FAQs. If you have any further questions, please do not hesitate to contact us.
(All information has been researched to the best of our knowledge, but we do not accept any liability for its accuracy. They do not constitute legal advice).