The newly adopted German Supply Chain Due Diligence Act attracted quite some attention. Below are a number of questions that I have been asked repeatedly in the last couple of weeks plus my replies. Hopefully, you will find them helpful.
The German Supply Chain Due Diligence Act that has now been passed was extremely controversial. What will companies now need to face?
Large companies that operate a branch in Germany with more than 3,000 employees will be obliged to take action against human rights and environmental violations at their suppliers from 2023 onwards. Specifically, these companies must introduce a risk management system that measures the corresponding risk potential for direct suppliers and, if necessary, take countermeasures. Occupational health and safety standards must be adhered to, and environmental damage that endangers human health must be avoided. One year later, from 2024, the law will also include smaller companies with 1,000 employees. In total, that would be around 4,800 companies affected.
The law involves high costs. Will all products now become more expensive?
It is estimated that the bureaucratic cost of compliance is between EUR 150,000 and EUR 600,000 annually, with larger companies and less expertise in supply chain management likely to be at the higher end of this scale. On the other hand, there are fines for misconduct, which can amount to up to two percent of the annual turnover. The former is not much, the latter could be. But it should be noted that misconduct leads to a massive and expensive loss of reputation. These costs can be significantly higher, as the Rana Plaza example has shown us. All in all, it can therefore be said that the costs of risk avoidance are low compared to possible losses if misconduct is discovered.
Originally it was envisaged that the law should also apply to medium-sized companies with over 500 employees. Are these now "off the hook"?
Rather no, because large companies have to relate risk management to their direct suppliers and medium-sized companies are among them. One instrument of enforcement will be that the large companies will demand that their suppliers provide guidelines on how they themselves will enforce social and ecological standards with their suppliers. So the standards will slowly seep through the supply chains. Companies of all sizes and in all industries should prepare accordingly today and build up appropriate competences.
The liability clause was removed from the law after a long struggle. Is the law now a "toothless tiger"?
Science has actually shown that companies react more strongly and comprehensively to laws that contain liability clauses. But with or without liability: A law can only define the lowest common denominator. The German Supply Chain Due Diligence Act expresses what society wants and what will be legitimate in the long term. There will be companies that only do what they absolutely have to do, and there will be others who see the law as an opportunity to differentiate themselves from the competition. These will lead the way towards clean and safe supply chains.
Prof. Dr. Julia Hartmann, 17 June 2021. Special thanks go to Amir Arabshahi for sharing the picture via unsplash.com!