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The Adoption of the Act on Corporate Due Diligence in Supply Chains

10.08.2021 - Article

Germany’s Act on Corporate Due Diligence in Supply Chains (Due Diligence Act) (Business and Human Rights) and the UN Guiding Principles & German National Action Plan (NAP)

According to the United Nations Guiding Principles on Business and Human Rights, the primary obligation to protect human rights, including human rights in the business context, lies with states. Nevertheless, companies have a responsibility to respect human rights, too – in the context of their own business activities and along their value chains. Companies are expected to meet this responsibility by conducting a process of human rights due Diligence.

In order to implement the UN Guiding Principles within the national context, Germany published a National Action Plan (NAP) in 2016. This National Action Plan describes a wide catalogue of measures to implement and strengthen human rights in the business context and thereby uphold the state’s duty to protect human rights.

The National Action Plan was also the first German Government document to include provisions on companies’ responsibility to respect human rights. It spells out the German Government’s expectation that all companies adhere to their human rights obligations and respect human rights along the supply chain.

Following the publication of the results of the NAP monitoring survey in summer 2020, the German Federal Government drafted a legislative proposal for mandatory human rights due diligence which was presented to the public in February.

Act on Corporate Due Diligence in Supply Chains:

What is the Due Diligence Act?

The adoption of the Act on Due Diligence in Supply Chains (in German: Gesetz über die unternehmerischen Sorgfaltspflichten in Lieferketten/Lieferkettensorgfaltspflichtengesetz (LkSG)) by the German Bundestag on 11 June 2021 constitutes a milestone for more effective protection of people and the environment in global supply chains, and for inclusive growth for partner countries. In adopting this law, Germany has now for the first time issued binding regulations on mandatory steps to be taken by companies in order to ensure compliance with internationally recognised human rights and certain obligations relation to environmental protection.

To whom does the Act apply?

  • Companies with at least 3000 employees will need to meet human rights due diligence obligations in their own operations and along their supply chains as of 1 January 2023.
  • As of 2024, the provisions will also apply to companies with at least 1000 staff.
  • The law deliberately does not take a sectorial perspective, i.e. it is not restricted to certain industries or products which are generally considered to constitute “high risk” contexts.

The companies are required to establish appropriate management procedures in order to ensure that human rights are respected throughout their supply chain – from raw materials to the finished product for sale.

The Act includes an exhaustive list of eleven internationally recognised human rights conventions and aspires to be clear in defining the relevant human rights which form the normative basis for the corporate risk assessments. Relevant legal rights are to be found in the two international human rights covenants (on political and civil rights and on economic, social and cultural rights) and the nine ILO conventions including the four ILO core labour standards. They include, by way of example, the prohibition of child labour and forced labour, freedom of association, non-discrimination and property rights.

Environmental rights are included if they are linked to human rights, for example in the case of contaminated drinking water. Also, two problematic environmental substances have been included in the law’s scope: mercury and POPs (Persistent Organic Pollutants). A further environment convention, the Basel convention on hazardous waste exports, has been included in the law. This also serves to protect human health.

The due diligence obligations are applied in a tiered model, depending on whether they relate to the company’s own operations, a direct supplier or an indirect supplier. A direct supplier is characterised by an immediate contractual relationship. This approach mirrors the varying degrees of influence that a company is generally supposed to have on the different tiers of operations relevant to its business model.

Companies’ due diligence obligations follow a risk-based approach. Obligations must be fulfilled continuously for their own business activities and direct suppliers.

Which concrete steps are included to fulfil obligations?

  • A proper human rights related risk assessment must be conducted at least once a year and additionally if the occasion so requires, in other words if there are significant changes within their business activities, such as the launch of new products and business relationships.
  • This risk assessment is a crucial step to assign priorities for further action. Salient issues need to be addressed first. Saliency in this context refers to the harm that can be inflicted on the victims.
  • In the light of the risk assessment, the company has to adopt a policy statement concerning its respect of human rights stating and explaining the due diligence obligations and activities of the company.
  • The company will have to take preventative measures in order to mitigate the assessed risks along the value chain.
  • If human rights are violated, the company must provide a remedy. Within its own business activities, a company must ensure the remedy results in a termination of the violation. Should the human rights violation occur within the supply chain under the responsibility of a direct supplier, the company has to work out an effective remedial strategy with the supplier within a certain time frame.
  • If the company gains substantiated knowledge of human rights risks or even actual violations within its supply chain beyond its direct supplier (beyond tier 1), the company is obliged to conduct the full due diligence process for this incidence: risk assessment, appropriate preventative measures and concept for remedy in accordance with the company’s capacity for action (so-called “leverage”).
  • Companies are required to set up grievance mechanisms which allow for early flagging of risks and violations. In order to be effective, such complaints instruments need to be easily accessible to workers, business partners and local community members, also from remote ends of the supply chains. Complaints must not lead to repression or retaliation.
  • Companies have to report publicly on their human rights due diligence at least once a year. The report must include the human rights and environmental risks identified along the supply chain, the measures undertaken, an analysis of the impact and effectiveness of these measures, and conclusions taken into consideration for future measures.

How will the law be implemented?

The Federal Office for Economic Affairs and Export Control (BAFA) will ensure the effective implementation of the law. It will verify the companies’ published reports and call for improvements in the event of shortcomings. It will have powers of investigation within a company and will be able to apply sanctions if obligations are not met. A new structure with sufficient staff will be established at BAFA.

The law provisions coherently reflect the principle that remedy and improvement are to be prioritised over a retreat from business relationships. Termination of supply chain cooperation should only be a means of last resort in cases of protracted severe human rights violations beyond a company’s sphere of influence.

Companies failing to comply with the law will be fined and, if their failings are severe, these companies may be excluded from participating in public procurement processes for up to three years.

A breach of the obligations under this Act shall not give rise to civil liability. Civil liability established independently of this Act shall remain unaffected.

German trade unions and non-governmental organisations may also support injured parties from other countries by defending their rights before a German court as “representative actions”.

In the view of the legislator, these provisions form a cohesive whole and make this proposal the basis for a most ambitious law for effectively protecting human rights along global supply chains while at the same time taking duly into account practical business needs and constraints. The law underscores the firm commitment of the German Government and business sector to be leading partners in fair and sustainable globalisation. It extends the quality label “Made in Germany” to “Made with Germany” in global business operations.

Outlook & context: National Action Plan (NAP)

With this law, Germany is giving tailwind to an ambitious EU-wide directive on corporate due diligence which is being prepared by the European Commission. Such European action is crucial to create a level playing field and to amplify the human rights effectiveness of national action.

Once the EU legislation in place, the German Government will evaluate and adapt its own due diligence Act.

As important as mandatory human rights due diligence is, we are well aware that the challenge of sustainability in globalisation reaches beyond this regulatory approach. To effectively foster business respect for human rights, we need a comprehensive smart mix, i.e. a combination of mandatory and voluntary measures, on national and international level, taken by government authorities, but also involving a broad array of societal stakeholders. The smart mix is mirrored in the National Action Plans and needs to be continuously adjusted and updated.

Since the adoption of the first German National Action Plan in 2016 the agenda has evolved dynamically. That is why we have now started to review our NAP and to transform it into a fit-for purpose 2nd generation NAP.

Full and worldwide respect of human rights standards is high on the German Government’s agenda. Germany is committed to their implementation through foreign policy, development cooperation and economic partnerships. Within the framework of international cooperation, the Federal Ministry for Economic Cooperation and Development supports partner countries of the Global South in building adequate governance structures, rule of law mechanisms and capacities in order to adopt, monitor and enforce the relevant norms, from labour safety laws up to forest protection schemes. In so-called “reform partnerships”, support for partner countries is linked to human rights track records and sustainable economic policies.

In the same vein, we are committed to strengthening international organisations and other players who advance international responsible business conduct standards and implementation capacities. The German Government engages with and supports competent partners such as OHCHR, the ILO, the OECD and UNICEF. We see this as part of our overall commitment to active multilateralism. Not least, our smart mix includes assistance to businesses to help master the challenges of human rights due diligence. Information platforms and advisory services such as the Government’s “Helpdesk for Business and Human Rights” offer services to the private sector free of charge. Moreover, the Government has been actively driving an array of multi-stakeholder initiatives and sector dialogues that work on specific guidelines and projects for high risk industries. The German automotive industries and the mechanical engineering sector both have started ambitious human rights programmes which cooperate with international partner Projects.

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