Sustainable supply chains are on the rise. Learn more about the new German Supply Chain Law

Sustainable Supply Chains on the Rise

Whether upstream or downstream, sustainable supply chains attract particular attention in terms of sustainable development. The decision for a German supply chain law has now been politically announced and aims to make corporate due diligence obligations binding.

In the era of globalization and its anchored principle of ” global division of labor”, our economy is defined by high levels of international interconnections and interdependencies. Industries are globally connected through their production and procurement structures in a wide variety of directions, as are their new sales markets.

Food producers, for example, source raw materials from Africa or South America, and textile manufacturers have their products made in Asia. In this post, we take a closer look – following the decision to introduce a German supply chain law – and explore what new corporate due diligence obligations are associated with the law and how these can be met – for instance, with the help of digital processes.

Supply chains and their relevance for sustainability

Modern supply chains go hand in hand with an increasingly high level of social and environmental responsibility. This has matured as a clear awareness not only in economy, but also in politics. The German Federal Ministry of Labor and Social Affairs therefore provides the following definition of the term “supply chain” and the resulting corporate responsibility:

The supply chain encompasses the entire path of a product, from the extraction of raw materials, through manufacturing and processing, to the delivery of the product to the end customer. In the globalized world, several companies and suppliers are often involved in production. That’s why it’s important to look at the entire supply chain and pay attention to human rights, including working conditions and environmental protection.1

And so, for many companies, there are risks but also opportunities in taking a special look at the supply chain:

Risks

  • A prevailing lack of transparency in the supply chains with regard to sustainability-relevant aspects
  • A lack of enforcement and control of sustainability aspects along the supply chain
  • potential economic damage due to violation of minimum social and environmental standards (fines, sanctions, property damage, etc.)
  • Reputational risks due to insufficient fulfilment of corporate responsibility (example: Kik in connection with the collapse of the Rana Plaza textile factory, Bangladesh)2

Opportunities

  • Proactive risk and compliance management in terms of minimum social and ecological standards
  • More transparency and control over their supply chain 
  • An increase in competitiveness through a sustainable supply chain
  • A strengthened own credibility and consumer confidence (through the created transparency)
  • A positive image as “corporate citizen” by assuming corporate responsibility along the supply chain

In practice, this outlined area of conflict between opportunities and risks confronts companies with challenges and tasks that are not to be underestimated.

Focus on new corporate due diligence requirements

In order to make corporate responsibility more tangible in the context of sustainable supply chains, so-called “corporate due diligence requirements” have been defined according to OECD guidelines3 in the following areas over the past few years:

  • Respect for human rights (e.g. prohibition of child labor, protection against slavery and forced labor, social labor protection, etc.)
  • Compliance with environmental standards if they lead to human rights violations (e.g. poisoned water)
  • Avoidance of corruption, bribery, demands for bribes and bribery extortion
  • Respect for consumer interests
  • Duty of disclosure

In Germany, expectations of corporate due diligence to respect human rights have been specified in the “National Action Plan on Business and Human Rights” (NAP for short), with the aim of improving the human rights situation in global supply chains.

According to the NAP, human rights due diligence includes the following five elements or tasks:

  • Recognize responsibility
  • Identify risks
  • Minimize risks
  • Inform and report
  • Enable complaints

What in theory sounds so simple turns out to be much more demanding in practice: a representative survey conducted in July 2020 as element of the National Action Plan showed that only between 13 to 17 percent of the companies surveyed meet these NAP requirements.4 

A milestone: Binding obligation through a supply chain law

In order to make corporate due diligence requirements along the supply chain more binding, a very special solution has been lobbied for over the past few years: a supply chain law. Tireless negotiations between economic and political representatives came to an end in February 2021 with the decision by the German Federal Ministry of Labor and Social Affairs in favor of such a law. And so it is definite: A supply chain law in Germany is indeed coming.

Fact sheet on the German Supply Chain Law (in accordance with the resolution of the German Bundestag):5

Name: “Law on Corporate Due Diligence to Prevent Human Rights Violations in Supply Chains” (also: “Due Diligence Act”).

Objective:

  • Creating more justice for workers worldwide and empowering victims of human rights violations and civil society
  • Creation of legal certainty for German companies
  • Binding regulation of corporate due diligence requirements along the supply chain

Entry into force and affected parties:

The law will apply to companies with 3,000 or more employees from 2023, and to companies with 1,000 or more employees from 2024. The German Supply Chain Law has yet to be passed as part of the legislative process.

Requirements:

  • Establish and implement appropriate and effective risk management along the supply chain
  • Conduct a risk analysis to identify particularly high human rights and environmental risks
  • Take preventive and mitigative measures to prevent violations
  • Establish responsibilities for due diligence, e.g. appoint a human rights officer
  • Setting up a complaints procedure to address possible violations or breaches
  • Prepare and submit an annual report on compliance with due diligence requirements 

Similar to the CSR reporting obligation that came into force in 2017, only large companies will be directly affected and held accountable by the German Supply Chain Law. However, it is to be expected that with this law, too, the estimated 600 affected companies in Germany6 will pass on their compliance with due diligence requirements to their medium-sized suppliers and service providers in the upstream and downstream supply chain. And just as with the CSR reporting obligation at the time, there are two main forces in the market: those (e.g. “Initiative Lieferkettengesetz”) who see the law as a toothless tiger in terms of sustainable development, and those (e.g. business associations such as BDI) who see the law as a disproportionate burden on companies. At the same time, 50 companies have publicly spoken out for legal regulation in a joint statement.7

One thing is certain: The German Supply Chain Law will bring new requirements to companies in terms of supply chain management and the creation of transparency and collaboration along the supply chain. The key challenge is to integrate the extended due diligence requirements into the existing compliance management system and to introduce corresponding risk analysis and documentations.

Digital and collaborative management systems as part of the solution

In creating transparency along an entity as complex as the supply chain, there will be no avoiding an extensive and comprehensive digitization of processes. Digital solutions will be needed to help companies in practice to monitor their supply chains on a continuous, fact-based basis. To this end, data must be collected collaboratively along the supply chain, evaluated holistically and transferred into corresponding documentation.  At Cority, this necessity in the context of sustainability reporting was already detected 10 years ago.

“We observe that corporate sustainability has become a central management task in companies, which needs to be planned, controlled and communicated professionally. However, many companies still lack orientation on how to integrate processes efficiently and professionally, moving away from Excel spreadsheets to smart and collaborative process solutions. This also applies to supply chain management,” stresses Markus Bowe, Product Manager at Cority.

Based on the Sustainability Cloud solution, Cority offers its customers proven digital and collaborative process structures to create transparency on sustainability-relevant aspects. One example of this kind of solution developed by Cority is the digital platform GS1 Ecotraxx for GS1 Germany – a private sector organisation for modern communication and process standards. It is used for the efficient exchange of sustainability information between producers, suppliers and retailers.

Outlook

Currently, there is a patchwork of national and sector-specific standards and laws regulating corporate due diligence along the supply chain. Countries in the EU such as the Netherlands and France are leading the way with their already adopted legal regulations, even if these are being criticized for not being far-reaching enough. The EU Commission is also planning to introduce an EU law this year that will make companies liable if they violate or contribute to violations of human rights, environmental standards and good governance.8

In the end, the key to full transparency and traceability of supply chains lies in digitalization and big data. Innovative and digital tools are needed to support companies in this new management challenge. Blockchain technology is highly anticipated for supply chain management. In the future, blockchain technology could make it possible to reliably collect data along the supply chain and to verify and secure it by means of encryption.9

References

1 Cf. BMAS: LINK,
2 Cf. “Kik-Textilien in eingestürztem Fabrikgebäude”:LINK, vom 2.5.2013.
3 Cf. OECD: “OECD-Leitfaden für die Erfüllung der Sorgfaltspflicht für verantwortungsvolles unternehmerisches Handeln”, S. 10.
4 Cf. BMAS:  LINK, abgerufen am 14.3.2021.
5 Cf. Referentenentwurf des BMAS “Gesetz über die unternehmerische Sorgfaltspflichten in Lieferketten” vom 15.2.2021
6 Cf. CSR in Deutschland: LINK, abgerufen am 14.03.2021.
7 Cf. Tagesschau:LINK
8 Cf. LINK, abgerufen am 16.03.2021
Cf. EU-Parlament: LINK, abgerufen am 16.03.2021.
10 Cf. CHE Manager: “Mehr Transparenz durch digitale Lieferketten” LINK, abgerufen am 11.03.2021.

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