On January 1, 2023, the Supply Chain Act came into force in Germany. Consumers want to know how a product is made. Companies have to check their supply chains in detail. How digitalization can help.
We drink coffee from South America. Our cell phones contain rare earths from China. Our T-shirts are produced in Asia. The supply chain for manufacturing these products involves many steps, often outside Germany or Europe: starting with the mining of raw materials and ending with delivery to the consumer. They take place not only in the factories of the manufacturer itself, but also at its suppliers. Transport and storage are also part of the process. Many of these products are manufactured under poor working conditions, sometimes even with child or forced labor. Environmental damage is accepted. To protect human rights and the environment, the German government passed the Act on Corporate Due Diligence in Supply Chains in summer 2021. It came into force on January 1, 2023. The German Federal Office for Economic Affairs and Export Control (BAFA) can impose fines.
What is the goal of the Supply Chain Act?
When did the law come into force and who does it apply to?
What benefits does the Supply Chain Act bring for companies? Which for consumers?
What companies have to observe in detail - easy and simple.
Companies can initiate things out of their responsibility - let's go!
What might an example look like - in practical terms?
Europe: When is the EU supply chain law coming?
Where can I find the text of the act and further information?
What is the goal of the Supply Chain Act?
Our prosperity must not come at the expense of human rights and environmental damage. Consumers ask how the goods they consume were produced. Production conditions are becoming a purchasing criterion. With the 2030 Agenda, the United Nations has created a basis for shaping global progress in harmony with social justice and within the ecological limits of the planet. To this end, there are 17 Sustainable Development Goals (SDGs). The Supply Chain Act takes into account the due diligence obligations of companies with regard to "promoting decent work for all" (Goal 8) and "ensuring sustainable consumption and production patterns" (Goal 12).
The goals of the law:
- The Supply Chain Act defines the obligations of companies in protecting basic human rights. It shows how they comply with them in their supply chains. The law also applies to environmental damage by companies, for example when human rights are violated, such as through poisoned water.
- The law requires companies to report on their commitment.
- It strengthens the rights of workers in court. It enables claims for damages to be asserted in Germany.
When did the law come into force and who does it apply to?
The law came into force on January 1, 2023, initially for companies in Germany with more than 3,000 employees, thus affecting around 900 companies. From 2024, it will apply to companies with 1,000 or more employees, which is around 4,800 companies in Germany. It also applies to branches of foreign companies in Germany if they have 3,000 and 1,000 employees respectively. In its own business area, the company must take corrective action to end the violation of human rights. In the case of direct suppliers, whose input is necessary for the manufacture of the product, the company must draw up a concrete plan for prevention and minimization. In the case of indirect suppliers, that is contractual partners in the chain up to the raw material, the company must act when it learns of a possible violation.
What benefits does the Supply Chain Act bring for companies? Which for consumers?
Nationally consistent regulations and legal certainty will bring benefits to companies: They all offer their products and services on the market under the same competitive conditions. More importantly, "clean" supply chains are "in demand" among consumers and investors. Fair trade and organic labels make such information available and increase the sovereignty of consumers.
Companies position themselves through their commitment and transparent information about it. Through their demand, they can bring about an improvement in the situation of human rights and environmental conditions. They open up new target groups, register more demand and have greater freedom in pricing. If they know their supply chains well, they increase their economic resilience in the event of crises and become more resilient: with better risk management, they adapt their supply chains more easily. They achieve a better company valuation vis-à-vis analysts and have easier access to financing. They achieve their climate and business goals through lower CO2 emissions. In times of a shortage of skilled workers, this is not insignificant: they retain committed employees.
Citizens strive for a better world and want to live in a fair and sustainable way. For them, this includes better protection of human rights and the environment, and better and just living conditions for everyone. Sustainably produced goods protect the environment, not only for today's generations, but above all for future generations. Openly accessible information from companies provides people with the necessary decision-making support when shopping, traveling and also when making sustainable investments.
What companies have to observe in detail - easy and simple.
From raw materials to the finished product in stores: In accordance with their due diligence obligations, companies must determine the extent to which their business activities may violate human rights. They must prevent violations or take corrective action. A complaints procedure must be set up for those affected. The law aims to improve the protection of human rights within the scope of companies' capabilities. Business relationships are not to be broken off. Unless, in the case of a serious violation, measures for improvement could not be implemented within a specified period.
What companies are obligated to do: Due diligence obligations in their own business operations as well as to direct suppliers include:
- policy statement on the company's human rights strategy,
- regular risk analyses,
- establishment of a risk management system, including preventive or remedial measures,
- establishment of a grievance mechanism,
- annual public reports on possible risks, the measures and their impact, and findings for future measures.
What penalties are in force: The Federal Office of Economic Affairs and Export Control (BAFA) monitors enforcement of the law (information in German). The law requires an effort on the part of companies; it does not oblige them to succeed. Companies must demonstrate that they have done everything possible to identify risks in the supply chain and to prevent or remedy violations. BAFA imposes fines: up to 8 million euros or up to 2 percent of annual sales if the company has more than 400 million euros in annual sales. There is also the threat of exclusion from the tendering process for public contracts for up to three years.
Companies can initiate things out of their responsibility - let's go!
For people in developing and emerging countries, it is important that companies do not withdraw. What is needed is to improve living conditions on the spot. If you consider that Germany is the world's third-largest importer, purchasing can make a massive contribution to sustainable development with its demand and its procurement decisions, and can also consciously develop suppliers, says Yvonne Jamal of the JARO Institut für Nachhaltigkeit und Digitalisierung. If larger companies proceed in this way, small companies are supported in adapting to the changes.
What might an example look like - in practical terms?
In everyday life, companies have access to thousands or even millions of primary products and maintain extensive supplier networks. Supplier management with the additional human rights component can no longer be managed manually - especially since the collected data must be evaluated and verifiably stored. This is where digitization can help, for example the T-Systems end-to-end solution based on ServiceNow. The need for auditing varies depending on the supply chain to be checked: Textile production in emerging and developing countries requires a more extensive audit than cheese production in Switzerland. An artificial intelligence scans supplier contracts for specific parameters such as countries of origin and product groups like menswear, food and cameras. This is used to determine the initial audit type, its frequency and depth. Internal and external information (for example on audits, certificates, quality of cooperation) on suppliers is continuously used to check whether the audit type, frequency and depth are still appropriate. If necessary, special audits are set as a task in the system. This can be done either automatically by means of the above-mentioned parameters or on the basis of indications of human rights violations.
Europe: When is the EU supply chain law coming?
The European Corporate Due Diligence Act is on its way. Parliament and Council negotiators agreed on new rules. The law considers the entire value chain, that is all established direct and indirect existing business relationships. In addition, the Paris climate targets will be given greater weight. Also, companies are to be held liable.
Where can I find the text of the act and further information?
The German Federal Ministry for Economic Cooperation and Development has collected information on the Supply Chain Act here.
