Germany has a supply chain law. Following disagreements between the parliamentary groups and strong headwinds from industry associations such as the BDI and BDA, the Supply Chain Act has been repeatedly caught between the lines of conflict since summer 2020 and was last taken off the Bundestag agenda at short notice in mid-May. Today, the Bundestag passed the "Act on Corporate Due Diligence in Supply Chains". It will enter into force in 2023.
"It is true that the traditional industry and business lobby associations were able to partially prevail with their demands to weaken the Supply Chain Act. Nevertheless, the adoption of the law is an absolutely important step in the right direction - towards more social and ecological responsibility in the supply chain," summarizes Dr. Katharina Reuter, Managing Director of the German Sustainable Business Association.
Lobby groups such as the BDI, BDA and DIHK opposed the Supply Chain Act until the very end. At the behest of the Ministry of Economic Affairs, civil liability has now been completely excluded. Klaus Stähle, specialist lawyer for employment law and BNW board member ord net agrees: "The compromise on the Supply Chain Act with the exclusion of civil liability has a bland aftertaste. Although liability of German companies abroad is stipulated by the German Civil Code, only in rare cases will those affected exercise this right. An explicit mention in the law would have had much more impact."
What companies must do to comply with human rights from 2023
The Supply Chain Act, which will come into force in 2023, will initially apply to companies with a registered office or branch office in Germany with 3,000 or more employees, and then to companies with 1,000 or more employees from 2024. For companies with fewer than 1,000 employees, this means that they will continue to have no legal certainty or room for maneuver.
Companies affected by the Supply Chain Act are obliged to identify risks among their direct suppliers that could violate or jeopardize internationally recognized human rights and certain environmental standards (in relation to the UN Guiding Principles on Business and Human Rights). Companies must implement countermeasures for identified risks and report to the Federal Office of Economics and Export Control (Bafa). Fines are imposed for proven violations and companies can be excluded from public tenders for up to three years. In the case of indirect suppliers, however, German companies are only required to make improvements if they become aware of possible risks and violations.
Labour Minister Hubertus Heil describes the Supply Chain Act as "a piece of legal history" ahead of the vote in parliament. "We cannot permanently build our prosperity on the exploitation of people."
Distorted presentation
In his speech today, Development Minister Dr. Gerd Müller found clear words for the "extremely strong lobbying" against the Supply Chain Act: "Do unto others as you would have them do unto you" - I would like to see this saying hanging in the offices of employers' presidents and associations in Germany."
Contrary to the deliberately distorted portrayal by industry associations that companies based in Germany would be exposed to a high risk as a result of the law, it is actually the case that German companies are not liable for human rights violations as long as they have taken all possible and appropriate measures. The Supply Chain Act does not impose a duty of success on companies, but rather a duty to make efforts to prevent human rights violations. With regard to the frequently invoked additional costs: the EU Commission's study1 estimates the costs for large companies at an average of 0.005 percent of their profits. However, practical experience shows that higher increases in additional purchasing costs can also be expected in the first few years (risk identification, adaptation of the supply chain). Here, however, the costs for the companies must be set in relation to the costs for society as a whole. Recent examples of German companies (Tönnies, VW diesel scandal, Wirecard) show how unethical business practices can drive up social costs - with serious negative effects on the "made in Germany" quality label.
For companies that operate sustainably, the legal anchoring of corporate due diligence obligations is an important milestone, as it recognizes their core values and years of voluntary investment as forward-looking. The restriction to very large companies means that many small and medium-sized sustainable companies will continue to be at a competitive disadvantage.
Many of the BNW member companies show that there is another way: VAUDE Sports GmbH & Co KG, Wildling Shoes GmbH and Sono Motors GmbH, for example, have joined other companies in the BNW campaign #transparentbusiness for a strong supply chain law and are already successfully implementing the requirements of the law in their supply chain.
A stage success
The civil society alliance Initiative Lieferkettengesetz with over 128 organizations sees the law as a stage success and a political compromise. In addition to improvements, they are calling on the German government to advocate for a strong and effective supply chain law at EU level. In the legislative initiative report of the EU Parliament's Legal Affairs Committee, the requirements go far beyond the German law. If the European Commission follows these recommendations, the German government will have to improve the German Supply Chain Act in many areas in order to fully protect human rights and the environment.
1 British Institute of International and Comparative Law, Civic Consulting and London School of Economics: Study on due diligence requirements through the supply chain, study commissioned by the EU Commission, 01/2020
