On January 1, 2023, the German Act on Corporate Due Diligence in Supply Chains (LKSG) came into force. The Act established for the first time in Germany, the responsibility for companies to comply with regulations on the protection of human rights. In essence, German companies are required to implement due diligence obligations, such as the establishment of risk management processes to prevent and reduce human rights violations. The obligation relates not only to the company’s own area of responsibility or business activities, but also to the actions of contractual partners and suppliers.
This means that dealing with human rights issues is becoming part of the complex tasks of supply chain communication. Suppliers are increasingly being confronted with inquiries, posing challenges for small and medium-sized companies in particular, as larger companies are often passing on their own responsibility to their suppliers by means of contractual agreements.
The cornerstones of corporate due diligence obligations with regard to sustainability are also taken up by a draft directive of the European Commission on an EU supply chain law. The European Parliament published its position on the draft text of an EU Corporate Sustainability Due Diligence Directive (CSDDD) on June 1, 2023. Although the proposed regulations are based on the same core aspects as the LKSG, they go even further than the LKSG and provide for more far-reaching regulations. Not only would more companies be directly affected by the CSRDDD, but the fulfillment of due diligence obligations would also apply to the downstream value chain, and thus also to customers. What is new in the area of supply chain due diligence is that the draft CSDDD explicitly provides for civil liability, enabling affected parties to assert claims for damages for violations of human rights or for environmental damage – within the bounds of proportionality. Adoption of the Directive is expected by the end of 2023. A necessary amendment to the LKSG would then be required by the end of 2025/beginning of 2026.
Due diligence requirements have also recently been included in topic-specific regulations. For example, the draft EU Batteries Regulation (adopted by the EU Parliament on June 14, 2023) includes “the obligation of an economic operator in relation to its management system, risk management, third party verification and monitoring by notified bodies, and disclosure of information with the aim of identifying, preventing and managing actual and potential social and environmental risks related to the sourcing, processing and trading of raw materials and secondary raw materials required for battery production, including by suppliers in the chain and their subsidiaries or subcontractors.”
The EU Deforestation-Free Supply Chains Regulation, which was only adopted in May 2023, requires market participants, as part of their due diligence obligations, to, with regard to the prohibition of deforestation and the requirement to comply with local legal requirements on deforestation, a) collect information and data along the supply chain (e.g., geography), b) conduct a risk assessment, and c) take risk mitigation measures if necessary.
This represents a significant expansion of the communication tasks to be performed as part of supply chain management. Extensive data not only on materials used in parts and components must be collected, but also information on, for example, origin or country of production, carbon footprint and violations of human rights-related obligations.
Environmental and human rights due diligence thus becomes an approach to strengthen and promote sustainable corporate governance. Internationally operating companies are being held accountable and increasingly have to take responsibility for the (also indirect) impacts of their business activities.
Our team supports you in the identification and implementation of appropriate measures and strategies – from internal knowledge building to current site assessments to the integration of the supply chain. We would be happy to support you with tailor-made solutions and information on the topic of sustainability and product compliance!
