After a long tug of war, the German legislator has recently passed a new Law on corporate due diligence in supply chains. The so-called Supply Chain Act (Lieferkettengesetz) applies to any companies that are seated or have a branch with more than 3,000 employees in Germany. It defines the supply chain as all steps required to manufacture products and provide services, from the extraction of raw materials to delivery to the end customer.
As of January 1, 2023, companies and their suppliers will be obliged by law to observe human rights and environmental due diligence obligations along the supply chain appropriately. The Act imposes fines on almost all the legally required due diligence measures, up to 2 percent of the annual turnover for companies with more than €400 million ($486 million) in turnover.
Let’s take an example. Germany is one of the top 10 importers of agricultural and mineral products from Brazil, such as coffee, cellulose, wood, meat, leather and copper, and iron minerals. In Brazil, the production chains of agricultural and mineral products have, on several occasions, been overshadowed by human rights violations and environmental crimes. German-based companies that import from or manufacture in Brazil must certify the integrity of their supply chain also in Brazil.
The due diligence obligations under the Act establish a duty of effort. The companies must therefore demonstrate that they have implemented the due diligence measures described in the law. The obligations concerning human rights include, among other things, the avoidance of child and forced labor, slavery and the disregard of occupational health and safety obligations, prohibiting unequal treatment in employment, as well as the prohibition of causing harmful soil contamination, water, and air pollution, harmful noise emissions or excessive water consumption. Unfortunately, forced labor, child labor, workplace discrimination, deforestation, soil and water pollution, and even unprecedented environmental tragedies are part of the Brazilian reality. The same applies to many other countries worldwide.
The Brazilian example shows how deep the German Due Diligence supply chains Act might reach. According to the new law, companies based in Germany must ensure, more than ever, the integrity and respect for human rights and environmental protection throughout their entire supply chains globally. These rules also apply to supply chains to China (e.g., related to the persecution of Uighurs in the Region Xinjiang), child work in Bangladesh, or environmental disasters in Ghana for the electronic waste in Agbogbloshie.
Moreover, the new German law entitles persons whose paramount legal position, such as life or limb, has been violated, to engage, among other things, NGOs to assert their rights to litigation against companies in Germany. To ensure the integrity of their business concerning human rights and environmental protection, it is essential now that companies implement a risk management system for ESG to carry out risk analyses as well as implement preventive measures, not only inside their companies but also regarding their direct and indirect suppliers, especially the ones that are thousands of miles away.
The German Due Diligence in Supply Chains Act is a significant step towards human rights protection in the corporate world and has a global impact. In October 2021, also the European Commission plans a legislative proposal on due diligence in the supply chain to protect human rights and the environment. The protection of human rights is a matter of interest to all mankind, and laws dealing with the matter are bound to have an impact outside of national territories.
Dr. Eric Decker, pictured above left, is a Partner at COMINDIS, a boutique law firm in Germany for Compliance, Insurance & Dispute Resolution. Eric has worked previously as Legal Director & Head of Global Insurance at Bilfinger SE, a leading industrial services provider. At COMINDIS, he counsels multinational corporations, especially in the plant engineering, construction, and infrastructure industry on compliance, insurance, litigation & arbitration cases.
Dr. Esther Flesch, above right, is a Partner at FLESCH ADVOGADOS, a boutique law firm in Brazil that focuses on Compliance, Government Enforcement, and legal issues for investment in Brazil. Esther has led teams in global compliance cases & investigations and was regional leader and appointed Global Co-Chair of a Global Law Firm before founding FLESCH ADVOGADOS. She was Lead Counsel in several of the most significant Brazilian investigations and compliance settlements.
The authors would like to thank Sophia Flesch and Dr. Ingo Kühl for their assistance with this post. Sophia is an associate at FLESCH ADVOGADOS. She represents clients in government and internal investigations and white-collar litigation. Ingo is a partner at COMINDIS representing multinational clients in compliance, insurance, and litigation/arbitration cases.