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The Lieferkettengesetz: Human rights due diligence mandatory through German companies’ supply chains

Despite several delays, the German human rights due diligence law stands to become reality. The highly debated law will change the workflow for companies in the German steel and metals industry and impact their partners worldwide.

Market Insights

In Germany, increased awareness of human rights abuse, child labour, and environmental damage in third countries have been driving forces behind the disputed human rights due diligence law. The law is also known under the more popular term ‘Lieferkettengesetz’.

The ‘Lieferkettengesetz’ aims to:

  1. Obligate German companies to practise human rights due diligence throughout their supply chains.
  2. Make it mandatory for German companies to practice environmental due diligence through their supply chains.
  3. Empower global workers’ rights to claim work injury compensations from German companies in the courts of Germany.

The ‘Lieferkettengesetz’ in short

The ‘Lieferkettengesetz’ is a human rights and environmental due diligence law. The law will be legally binding for companies residing in Germany but will impact global business partners throughout their supply chains.

The focus of the ‘Lieferkettengesetz’ is to make sure German companies have the knowledge and processes in place to identify, analyse, and prevent human rights abuse and minimise environmental damage.

If German companies fail to uphold their obligations, they stand to be held legally accountable.

The law will apply to companies that have more than 500 employees.

Currently, the exact wording of the law is unknown. However, there is sufficient material – both from leaked early-stage legislative texts and public debate – to consider how the law will impact companies in the German steel and metals industry. Including what preparatory measures market participants can benefit from implementing.

Background on the human rights due diligence law

In 2011 the UN published its guiding principles that set clear minimum obligations for companies to ensure that their social and ecological supply chains were without human rights abuse, child labour, and environmental damage.

How to guarantee that the companies actually fulfil their due diligence obligation is up to the countries themselves to decide. Germany opted to enforce these principles voluntarily without any supporting laws. However, as part of the current government’s coalition contract, it would set up a legal framework should the companies not fulfil those obligations.

Prior to the establishment of the current government, German companies with more than 500 employees were in 2016 urged to voluntarily check and report whether human rights were respected along their supply chains.

In 2017, the newly instated government decided, if 50 percent of the companies met the criteria, they wouldn’t put down a legal framework mandating companies to live up to pre-determined standards. The results of the survey were sobering: After four years, only 455 of the 2,254 companies that were selected to take part in the survey had participated. Out of those, only 17 percent of them met the criteria from the UN.

That was when the work on the infamous ‘Lieferkettengesetz’ began.

A need for a supply chain law

Human rights violations in global supply chains have long been an issue. According to the Global Slavery Index 2018, 40.3 million people were forced into modern slavery in that year. 24.9 million of those people were subjected to forced labour.

The worldwide problem with human trafficking, forced labour, and child labour reduces costs through the supply chain. In extension, increasing the profits for companies along the line.

Some countries such as The Netherlands, the UK, and the US have already implemented legal frameworks around the UN’s guiding principles. That way, demanding that companies residing in their countries do their utmost to reduce the risk of human rights violation and environmental damage throughout their supply chains.

However, that is not enough. Being the world’s third-largest importer of material, German companies have a great responsibility to fight against human rights violations and environmental damage. The majority of the German companies thus far haven’t lived up to their responsibilities. A fact, the ‘Lieferkettengesetz’ stands to change.

The ‘Lieferkettengesetz’ in action

If German companies fail to do everything within reason to identify, address, and remedy abuse along their supply chains, they could be held liable for those violations. As of now, it looks as if companies will be held liable in civil courts in Germany, but not criminal. However, this is one of several points that are yet to be determined.

For companies to be able to live up to their obligations, increased transparency in the supply chains is the way forward. To achieve this, the ‘Lieferkettengesetz’ leans towards the UN’s guiding principles. The companies should, therefore, implement these three pillars:

  1. A policy commitment to meet their responsibility to respect human rights.
  2. A human rights due diligence process to identify, prevent, mitigate, and account for how they address their impacts on human rights.
  3. Processes to enable the remediation of any adverse human rights impacts they cause or contribute to.

Whether companies follow these principles and realise the requirements will most likely be overseen by a federal authority. An annual report on the steps they have taken to fulfil their responsibilities should be sent to that authority. If the measures haven’t been sufficient or a company hasn’t taken corrective actions, the unspecified federal authority stands to be able to hand out fines.

When the final version of the ‘Lieferkettengesetz’ will be approved and put into effect is still unknown. However, the government’s goal is to, at the latest, have it ready before the election period ends in September 2021.

Take preparatory measures

The law proposal has been concerning many market participants. One concern has been the risk of German companies standing weaker in the global market competition due to increased prices. Another worry is that the additional documentation will become a bureaucratic hassle.

Not knowing the exact legislative text makes it impossible to know precisely how the ‘Lieferkettengesetz’ will impact the industry. However, for companies in the steel and metals industry, taking preparatory measures will boost the resilience across the company to adjust to the changes the law is bound to create.

Some of those measures companies ought to consider could be the following:

  • Create companywide politics clarifying the company’s stance on human rights and environmental damage.
  • Consider and research best practice processes to carry out due diligence. Find a process that fits your company the best.
  • Implement a risk management system.
  • Consider how to overcome increased documentation duties.

The industry is moving ahead before the ‘Lieferkettengesetz’

Market participants such as Stahl-Holding-Saar (SHS) have already implemented a long row of processes to live up to their responsibilities to diminish human rights abuse and environmental damage through their supply chains.

With a Code of Ethics, Code of Conduct, and the contracts all containing key principles on responsible procurement and social standards, SHS has already committed to a policy protecting human rights and the environment.

At the same time, the company has put in place a risk management system. The company also regularly check up on its suppliers and providers to see whether they respect the sustainability standards SHS has set.

Those are just some of the implementations SHS has executed. The company has also changed its logistics and transport to more environmentally friendly modes and publishes annual reports about their progress. In the same manner that the ‘Lieferkettengesetz’ stands to require as well.

Getting all of these new processes in place takes time. This is why taking preparatory steps is critical to a seamless implementation and to be ahead of the game.

Metalshub a helping hand through the changes

The new processes and increased need for documentation will inevitably lead to an added workload. However, digital platforms such as Metalshub will be pivotal to stem the additional documentation duties.

Increasing visibility through the supply chain is a cornerstone in Metalshub’s business. That is why the trading platform makes it easier for market participants to fulfil the due diligence principle, as there are no middlemen between sellers and buyers.

Simultaneously, it’s easy to audit the transactions on the platform. This way, the new documentation duties will be simpler to overcome. That gives companies time to concentrate and implement new processes in their business.

If you’re interested in hearing more about how Metalshub can help your business adjust to the new demands, schedule a demo with our team now.

#lieferkettengesetz, #supplychains, #Humanrights, #Germansteel, #metalsindustry, #environmentalduediligence