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Supply Chain Act: More care for people and the environment

From 2023, companies will bear sustainably more responsibility

It is about people and rights. The German Supply Chain Sourcing Obligations Act (LKSG) is intended to help improve living conditions worldwide. To this end, it creates new requirements that ensure companies fulfil their social responsibility: through risk analysis and risk management, prevention, and remediation, as well as documentation and reporting. The Supply Chain Act aims to prevent environmental destruction and exploitation.

Almost 80 million boys and girls are affected by child labour, more than 25 million people have to perform forced labour: these are depressing facts that the German Federal Ministry for Economic Cooperation and Development (BMZ) has compiled from supply chains. Figures that explain why politicians no longer wanted to wait for voluntary commitments by business to improve the human rights situation worldwide. On 1 January 2023, the Supply Chain Act will therefore come into force, initially for the approximately 600 companies in Germany with more than 3,000 employees. One year later, it will also apply to the approximately 2,900 companies with 1,000 or more employees, regardless of whether they belong to German companies or are branches of foreign parent companies.

The contents of the Supply Chain Act are based on the UN Guiding Principles on Business and Human Rights (UNGP). They create new obligations for companies to ensure that at all stages of the supply chain, from the purchase of raw materials and intermediate products to distribution to end customers, the rights of all participants are respected in the spirit of honourable business. These requirements include:

  • the issuing of a policy statement on the Human Rights Strategy
  • the determination of responsible persons
  • the implementation of regular risk analyses
  • the establishment of a risk management system
  • the commitment to effective prevention and remediation measures
  • the publication of an annual report on the fulfilment of due diligence obligations
  • the creation of a complaints procedure for whistle-blowers

These obligations are supported by regulatory control via the German Federal Office of Economics and Export Control (BAFA).


The Supply Chain Act aims to improve the human rights situation

With the new law, companies are required to align their purchasing behaviour with the principles of social responsibility. Forced and child labour, slavery, and discrimination as well as the disregard of labour protection standards are expressly prohibited. In addition, environmental damage through soil degradation, noise emissions, water and air pollution and excessive water consumption are prohibited. Furthermore, the regulations require the payment of living wages for all workers – at least the respective locally applicable minimum wages. In these areas, companies affected by the Supply Chain Act bear responsibility for their entire supply chain – In their own area as well as with their direct suppliers and – upon knowledge – also with indirect suppliers who are subcontracted.


Looking the other way is impossible: The Supply Chain Act obliges to provide information

With the entry into force of the Supply Chain Due Diligence Act, social control is complemented by regulatory auditing. Whereas in the past it was still possible to build business relationships on price negotiations alone, companies are now obliged to conduct risk analyses of the human rights situation and environmental standards of their contractual partners. With the results of this analysis, they must also establish a risk management system that enforces measures to stop human rights violations and environmental degradation. These obligations also apply to indirect suppliers, provided that the contracting bodies have become aware of them. To ensure that these requirements are met, an obligation to document these measures internally as well as to submit an annual public report is part of the provisions of the law. The report is intended to create transparency about compliance with the law. It also provides a presentation of the effectiveness of the measures taken in addition to the risk analysis and control. It must also be publicly accessible for at least seven years. If the companies subject to the law do not comply with these requirements, BAFA, as the supervisory authority, can impose fines, starting at a minimum of 175,000 euros up to eight million euros or a maximum of two percent of the annual turnover. In addition, these companies are excluded from the awarding of public contracts.


What are the implications of the Supply Chain Act for logistics?

In two stages in 2023 and 2024, large shippers in Germany must get a picture of the human rights situation at their direct suppliers and subcontractors. This also includes logistics service providers, for whom the Occupational Health and Safety Act and the Minimum Wage Act come under scrutiny as a matter of priority: Do they enable their drivers to comply with driving and rest times? And do they receive at least the legal minimum wage or living wages at all their work locations? What is new in this context is the obligation to also consider these issues in non-European countries – because until now, only the regulations of the European Union (EU) applied here. The Supply Chain Act now removes this geographical limitation and makes cooperation with all contractual partners worldwide subject to the obligation to respect human rights. This results in an obligation for logistics service providers to document the deployment of their drivers in a transparent and meaningful manner. Be it with regard to working hours, which are only monitored by the electronic tachograph within the European Union. Or beyond that in the area of minimum wages. Here, the documentation of each border crossing takes on new significance, as this is the only way to prove the correct payment of the drivers during the entire duration of the tour. Mobile apps that document working times and routes in parallel to the work process in real time make it possible to fulfil reporting obligations effortlessly and without additional administrative work.


The Supply Chain Act makes responsibility effective

Progress is being made in protecting the vulnerable and dependent as well as the environment worldwide. With the Supply Chain Act, the federal government obliges large internationally operating companies to ensure the protection of the lives, health and livelihoods of all workers. Ignoring oppressive and degrading conditions in favour of higher profits becomes risky and possibly even expensive. Social responsibility comes into focus and is effectively demanded through reporting obligations. Logistics service providers can create the necessary documentation via mobile apps without additional effort in the ongoing process.

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