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New supply chain law in Germany

Because enterprises have massive supply chains for their products, it’s easy to lose track and insights into human rights and environmental risks in the supply chain. In Germany, legislation has now reacted to this: In 2023, the Supply Chain Sourcing Obligations Act will come into force in Germany.

Das Lieferkettensorgfaltspflichtengesetz

Around 80 % of world trade is based on global value chains. (Source: https://unctad.org/press-material/80-trade-takes-place-value-chains-linked-transnational-corporations-unctad-report) Still, companies mostly fail to meet their obligations with regard to supply chains. Because enterprises have massive supply chains for their products, it’s easy to lose track and insights into human rights and environmental risks in the supply chain. While this is hardly compatible with modern companies’ self-image and ESG criteria, they are often unaware of how much of an influence they have on changing these conditions. In Germany, legislation has now reacted to this: In 2023, the Supply Chain Sourcing Obligations Act (Lieferkettensorgfaltspflichtengesetzor short LkSG) will come into force in Germany.  

What is the new LkSG (German supply chain law)? 

The LkSG aims to improve the protection of human rights and the environment in the supply chain. The law states that companies must identify risks of human rights violations and environmental damage in their direct suppliers and partly even with deep-tier suppliers. If they discover irregularities, they must take countermeasures and document them to the German Federal Office of Economics and Export Control (BAFA). The law outlines reporting, prevention, and countermeasures.  

 

What companies have to comply with LkSG? 

The LkSG affects all companies based in Germany with more than 3,000 employees. The law comes into place in January 2023. From January 2024, the threshold will drop to 1,000 employees.  

 

Human rights and sustainability in the LkSG 

The new German LkSG is primarily about identifying human rights risks in the supply chain. While there is no explicit climate-related due diligence obligation, the LkSG does allow it to be interpreted that way. Environmental protection is taken into account insofar as companies have to report on environmental risks that can lead to human rights violations. The decisive factor here is how the concept of air pollution, mentioned in the LkSG, is interpreted. Companies must ensure that air pollution from their suppliers can neither impair the natural basis for the preservation and production of food nor cause damage to human health. This is broad wording, and companies will likely interpret this very differently.  

 

Plans for a European supply chain law 

While other European countries already have a supply chain law in place, the EU Justice Commission is also planning a European supply chain law. The interesting thing here is that the draft of the European version looks at human rights and the environment in equal parts. The European Parliament’s draft of the EU supply chain law clearly states that the duty of care should also cover a company’s environmental impact, including its contribution to climate change. In the best case, the European supply chain law will combine the best of the due diligence laws of the member states, e.g., the definition of the entire value chain from the Netherlands, strong regulatory enforcement from Germany, and civil liability from France. 

“The fact that companies slowly become responsible not only for what happens behind their own doors but also for the actions of their suppliers is a good thing through and through. What most of them don’t suspect right now is how much they will profit from it. Providing transparent information about ALL business activities is a competitive average and will be liked by customers and partners. In my opinion, the German LkSG should have been stronger on the environmental side, but I’m confident that the European supply chain law will make up for that. In any case, I would refer enterprises to get a good overview of what’s happening in their supply chain, even in the deep tiers. If not, the supply chain law will make this obligatory; other laws about compulsory reporting on Scope 3 emissions are soon to be expected. I’d recommend everyone to start investing in this now.”

Fabian Hassel

Fabian Hassel

VP of Services at Makersite

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