Published by the German government in 2021, the final report entitled “Monitoring the Implementation Status of the Human Rights-Related Due Diligence of Companies Described in the National Action Plan Economy and Human Rights 2016-2020” revealed that over 80 percent of companies based in Germany with 500 or more employees insufficiently perform their due diligence duties in the supply chain. The consequence of this investigation: the passing of the German Act on Corporate Due Diligence Obligations in Supply Chains (referred to below by its German abbreviation, LkSG) by the German Bundestag, which went into force on January 1, 2023.
What is the objective of the LkSG?
The objective of the LkSG is to improve transparency and strengthen human rights in the supply chain.
Who is affected?
The LkSG initially applies to all companies based in Germany that have more than 3,000 employees. This threshold will be reduced to 1,000 employees starting in 2024. This will also shift the focus to SMEs with far fewer than 1,000 employees, however, because the due diligence obligations apply throughout the supply chain and thus to smaller suppliers as well.
In addition, a supply chain act is also under discussion at the EU level and is expected to pass by 2024. The law expected to be adopted by the EU contains even stricter rules. The discussions involve additional application areas and due diligence obligations for companies, as well as liability under civil law.
What does it mean for companies?
The majority of global trade involves global supply chains. The LkSG focuses on this specific connection and requires companies to respect human rights, improve their environmental protection measures, and take responsibility for the supply chain. Transparency, in particular, plays a major role here.
For companies, this means controlling their ecological, social, and economic impacts and mitigating them over the entire life cycle of their products and/or services. The ecological and social requirements must be integrated into a competitive model. Companies are required to provide information, disclose their data, and implement corrective measures.
A variety of sustainability standards and benchmarks ensure that companies can live up to their responsibilities. The United Nations Global Compact (UNGC), for example, has defined ten criteria for measuring sustainability in the supply chain, divided into four areas.
Ultimately, companies can only take one of two directions: Either focus on the minimum requirements and their implementation or seize the topics of sustainability and the LkSG as an opportunity. After all, public attention and many discussions are increasingly sensitizing customers to the topic, and they are adjusting their buying patterns accordingly. This enables companies to capture a significant competitive advantage through their actions.
What are the potential penalties for non-compliance or misconduct?
If companies fail to comply with the requirements of the LkSG or in the case of corresponding misconduct, the law stipulates penalties and fines of up to 50,000 euros or up to 2 percent of annual turnover if they fail to implement mitigating measures. The two-percent fine applies to companies with annual turnover exceeding 400 million euros. Further fines must be paid if no preventive measures have been implemented, for example, or if complaint processes (up to 8 million euros) or risk analyses (up to five million euros) are lacking. Companies can also be excluded from the award of government contracts as a penalty.
How can Scheer support you?
We at Scheer offer an extensive solution portfolio for your sustainability management. The relevant processes are usually already present at a company and only have to be enhanced and adapted accordingly. The following aspects have to be taken into account for the LkSG:
- Risk-based approach to identifying hotspots in the supply chain
- Individual address of suppliers to exchange data and information
- Assessment, prioritization, and segmentation of suppliers
- Transparency along the supply chain
- Ongoing risk management for monitoring and mitigation
Get in touch with us – after all, sustainability and profitability aren’t mutually exclusive.
Author: Alexander Neske