German Supply Chain Law comes into force on 1st January 2023

The “Act on Corporate Due Diligence in Supply Chains” was passed by the German Bundestag in June 2021 and will come into force in a few short days - on 1st January 2023. It will initially cover large companies with 3,000 or more employees, and from 2024 also companies with 1,000 or more employees.

What does this mean for companies? From Sunday, they have to identify risks of human rights violations and environmental destruction at direct supplier companies and, if applicable, also at indirect supplier companies (i.e. contracted by third parties), take countermeasures and document these to the Federal Office of Economics and Export Control (BAFA).

New Supply Chain Law is a milestone

It is generally seen as a milestone, especially beyond Germany's borders, as the new Supply Chain Law forces companies to take responsibility for the conditions in their supply chains. But there is still room for improvement, such as the inclusion of SMEs, a civil liability rule and more detailed environmental and climate protection rules to be worked out in the future.

“The handwriting of the business lobby and the CDU/CSU is clearly recognisable in the law. Above all, a civil liability rule that better protects those affected is missing. In addition, the law neglects many aspects of environmental and climate protection. It is also shocking that the same stakeholders are using global crises such as the Corona pandemic and the Russian war of aggression against Ukraine as a pretext to prevent the law from coming into force on 1st January,” commented Johanna Kusch, coordinator of the German alliance "Initiative Supply Chain Law", in a statement.

Effective implementation is key

Heike Drillisch, coordinator of the CorA Network for Corporate Responsibility, is concerned about the law’s implementation: “Binding due diligence obligations finally apply to large companies in Germany. The Supply Chain Due Diligence Act must now be effectively implemented by the BAFA, also in close cooperation with civil society and stakeholders. Precisely because regulatory control is the only enforcement lever for the law, it must work well,” she cautioned.

“BAFA must make full use of its powers, establish effective inspection criteria and carry out risk-based inspections of companies,” stipulated Drillisch. “Proof of certifications or participation in industry initiatives alone cannot be considered sufficient evidence that due diligence requirements have been met - examples such as the dam burst in Brumadinho, Brazil, have proven this.”

This requires having enough staff: “The Law also provides that the authority can take action at the request of those affected. This application procedure must be designed in such a way that it is accessible, legitimate and predictable in accordance with the UN Guiding Principles on Business and Human Rights. A prerequisite for good implementation is that the responsible BAFA department is assigned sufficient staff,” said Drillisch.

Germany is leading the way in Europe

In view of the current EU negotiations on European supply chain regulations, Drillisch points to the pioneering role and the exemplary function that Germany is assuming in regulatory enforcement for Europe.

The European Council of Member States decided on 1st December 2022 its position on a European Commission proposal in this regard. The European Parliament's position is expected in May 2023, after which all three institutions will have to agree on common regulations.

“What we need now is good implementation in Germany and a commitment to strong EU regulations that can permanently close the loopholes in the German law. With a view to a European regulation, the German government must also make good on its promise in the coalition agreement and work for an effective EU supply chain law in the coming year,” said Kusch.