Global businesses must acknowledge new ESG auditing laws in order to satisfy German customers
Germany's new Supply Chain Act is set to target businesses that cannot demonstrate human rights and environmental transparency in their global supply chain
The new Supply Chain Act, also known as Lieferkettengesetz (LkSG) in German, came into force on January 1st 2023, and focuses on the transparency of ESG factors within German companies' global supply chains to promote better working conditions and increased sustainability efforts.
Under the new rules, German businesses must provide evidence that they are complying with strict ESG guidelines including human rights and environmental standards. Failure to do so could result in a fine of 2% of the company's global turnover in addition to challenges relating to gaining public contracts.
Initially, the new ruling will apply to businesses with a registered office or branch in Germany employing 3,000 or more people. From 2024, this will expand to companies with employee numbers over 1,000.
Whilst the new legislation establishes a duty of effort, businesses are not necessarily obliged to guarantee the prevention of human rights violations in all instances but must give evidence that they have done everything in their power to prevent human rights risks throughout their supply chain. Businesses complying with the Modern Slavery Act in the UK will in most cases automatically satisfy the human rights element of the new German Supply Chain Act.
As per LkSG guidelines, companies will be responsible for:
- The implementation of a human rights-related risk management system
- The implementation of an in-house body, responsible for human rights protection
- The implementation of a human rights-related risk analyses
- The declaration of basic principles for the protection of human rights in business
- The implementation of preventive measures in the own business area and vis-à-vis direct suppliers
- Remedial action in the event of a human rights violation
- The implementation of a complaints procedure with regard to the notification of human rights violations
- The implementation of due diligence measures with regard to risks connected to indirect suppliers
- The implementation of documentation and reporting measures connected to the fulfilment of mandatory due diligence obligations