The German Supply Chain Due Diligence Act, Gesetz uber die unternehmerischen Sorgfaltspflichten in Lieferketten (LkSG), translates to The Act on Corporate Due Diligence Obligations in Supply Chains.
Introduction to the German Supply Chain Due Diligence Act (LkSG)
The Act on Corporate Due Diligence Obligations in Supply Chains (LkSG), also known as the German Supply Chain Due Diligence Act, came into force in January 2023, affecting firms in Germany employing more than 3,000 people.
By January 2024, it will extend to companies with over 1,000 employees. Companies caught in the scope will have their main headquarters or administrative base in Germany or operate a branch in Germany employing at least 1000 workers. Although the jurisdiction only applies to Germany, investigations may be opened overseas if supply chain breaches of a German company are discovered by German authorities.
Objective and focus of the Germany Act on Corporate Due Diligence Obligations in Supply Chains.
The Act’s core objective is to avoid violations of human rights and environmental protection laws in supply chains. This legislation directly pins the accountability on German companies. They can no longer overlook the risk of violations within their supply chains as this legislation impacts everyone in the chain, extending beyond the employees of the directly obligated firm or its supplier. Notably, this legislation requires that companies take only a duty of effort, not a duty to succeed. Nevertheless, firms must demonstrate that they have done everything in their power to curb the risk of violations occurring. The LkSG mandates the establishment of a risk management system to identify, prevent or minimize the risks to reduce the likelihood of infringements.
Inclusion of environmental protection
While the Act mentions environmental laws, its primary emphasis appears to be on the protection of human rights. Environmental violations are covered only when they indirectly impact human rights, such as human health. The inclusion of environmental laws was controversial during the legislative drafting process. Given the introduction of the European Union’s Supply Chain Directive and its detailed directory of environment-related violations, the LkSG may need to be adapted into alignment with the EU legislation over the coming years.
LkSG steps to compliance
The LkSG takes a risk-based approach and necessitates
- Implementation of risk management; an individual risk assessment that requires businesses to consider the individual risk factors within their supply chain and business operations
- Conduct regular risk analysis- the efficiency of the implementation measures needs to be examined at least annually, as well as on an ad hoc basis. Changes in the business operations or the business environments can be a reason for an ad hoc review
- Publish a public policy statement
- Enforce preventive and remedial measures; this must be across the whole supply chain
- Establish a complaints procedure; needs to be accessible by anyone in the supply chain
- Fulfill documentation and reporting obligations
LkSG penalties and enforcement
The German Federal Office of Economics and Export Control (BAFA) is responsible for monitoring and enforcing the LkSG. The department uses a risk-based approach and spans from plausibility checks to comprehensive audits and on-site visits, including international locations.
Sanctions for non-compliance include
- Monetary fines, the amount of which depends on the severity of the violation. Companies with an average annual turnover exceeding EUR 400 million may be fined up to 2% of their average annual turnover
- The prohibition from participating in public contracts in Germany for up to three years
Special litigation status
Trade unions and Non Governmental Organisation (NGOs) can conduct litigation on behalf of an affected person or interested party.
Several cases, including complaints by three NGOs against Amazon, Ikea, and Tom Tailor concerning their Bangladeshi suppliers, are presently under BAFA’s scrutiny. This move, coinciding with the Rana Plaza collapse’s tenth anniversary in Bangladesh, is perceived as politically motivated.
For enquiries about the LkSG, tracing your supply chain, or other sustainability-focused matters, please contact our sustainability services team using the link below.
