By Camilla Tagliabue
This blog post was submitted as a contribution to the Tabula project, an international and comparative research collaboration carried out over the summer of 2021.
In 2011, the United Nation issued the UN Guiding Principles on Business and Human Rights (UNGPs), which were endorsed by the Human Rights Council in a resolution on June 16, 2011. The UNGPs consist of rules, standards, and guidelines that states, companies, and enterprises (regardless of their nature, size, sector, ownership, or structure) around the world should respect in order to prevent, address, and remedy the abuses and violations of human rights by globalized business activities.
Following the publication and endorsement of the UNGPs, the German government published a National Action Plan in 2016 as a guide to implementing them at a national level. After several agreements, consultations, proposals, and reviews, on June 11, 2021, the Federal Act on Entrepreneurial Due Diligence Obligations in Supply Chains, also known as the German Supply Chain Due Diligence Act, was finally enacted.
The Act will become effective as of January 1, 2023, to provide ample time for companies to be in full compliance with the new set of rules and obligations. The Act will apply to all companies, German or foreign, that have a registered office, principal place of business, or branch office in Germany, regardless of the company’s structure, legal form, or ownership. At first, a company must have a minimum of 3,000 employees for the Act to apply; the minimum threshold will decrease to 1,000 employees a year later, on January 1, 2024.
The new obligations for companies that fall within the scope of the Act are provided with respect to all products and services offered by such companies, as well as all the processes applied, procedures followed, and steps taken to manufacture those products or provide those services, regardless of where they take place or by whom they are taken (i.e., by the company itself, or by a direct supplier or indirect supplier). In this regard, it should be noted that most of the daily violations of human rights and environmental standards occur during both the trade and manufacture processes.
Indeed, under the Act, companies are responsible for their own operations on their own sites as well as for the activities and omissions of their direct suppliers (with whom the companies have a direct contractual relationship) and indirect suppliers (stakeholders that do not qualify as direct suppliers), even though, for the latter, the actual responsibilities and obligations appear to be less strict.
The new set of rules set forth in the Act include, among other requirements and obligations, the revision or implementation of a Risk Management System (RMS) and a compliance management system, as well as due diligence procedures, in order to evaluate current and future supply chains and ensure that the companies, their employees, and their direct suppliers adhere to certain environmental standards and respect fundamental human rights.
In terms of the compliance management system, the Act also requires the appointment of an individual responsible for supervising the Risk Management System, and the establishment of compliance and reporting procedures as well as internal documentation outlining the actions taken to comply with the Act.
Due diligence procedures must be tailored to the business of the company and its interaction with all stakeholders involved in the supply chain. It must include an ongoing analysis of potential risk–both risk of violation of and direct threats to human rights or environmental standards, and risk of contributing to or being directly involved with the violation of such rights and standards, by the company itself or by its direct suppliers. In this regard, if the due diligence process detects the risk that an abuse or violation may occur in the supply chain, the company needs to adopt a Policy Statement. Such Policy Statement, to be reviewed and updated yearly, must include:
- a list of all the material risks detected during the due diligence;
- the procedure in place to ensure compliance with the Act; and
- the measures adopted to prevent violation of human and environmental rights, including how the employees and suppliers of the company are expected to act.
In the event that a violation occurs, or that the company or one of its suppliers contributes to such a violation, even though all the necessary preventive measures have been implemented, the company is required to provide and enact appropriate measures to stop the violation as quickly as possible. Such measures may vary based on the type of environmental or human rights violated, or the impact and duration of the violation; they may include, among other elements, the interruption of the business operations or even, as a last resort, the termination of the business relationship (if the violation was committed by the supplier).
The consequences triggered in the event of non-compliance with the Act emphasize the importance the new legislation places on the fight against human rights violations and environmental degradation. Indeed, if companies do not comply with the Act, they can be subject to serious reputational and financial damages, including a fine of up to 2% of the yearly global turnover and exclusion from public tender procedures. The new legislation also provides for the release of an annual report drafted by a competent authority that will detail any cases of non-compliance and the respective enforcement measures applied.
Furthermore, pursuant to the new law, non-governmental organizations and trade unions can be authorized by the affected parties to raise a claim on their behalf before the German courts. The claim would assess whether the rights of the affected parties have been violated or directly threatened by the failure of a company to implement a compliance management system or to conduct the necessary due diligence as required by the Act.
The Act is the first piece of German legislation requiring companies to establish, implement, and update internal compliance procedures and due diligence processes to terminate the abuses and violations of human rights and environmental standards throughout a company’s entire supply chain. It is one of the first steps toward achieving better protection of human rights and environmental standards in business operations. In addition, the new legislation will likely have an impact on other disclosure requirements and standards that companies must adhere to regarding Environmental Social Governance (ESG) matters.
In the meantime, the European Parliament issued a resolution on March 10, 2021, that, among other things, instructed the European Commission to submit a legislative proposal on mandatory supply chain due diligence. The legislative proposal was to be based on content suggested in the annex to the European Parliament resolution.
The European Parliament’s resolution came after public consultation on sustainable corporate governance, which ran from October 26, 2020, until February 8, 2021, and the 2020 publication of a final report by the European Commission on a study of due diligence requirements through the supply chain. The study had showed that a voluntary approach to corporate social responsibility by States and business enterprises is not sufficient in the fight against human and environmental rights violation; rather, mandatory due diligence legislation must be enacted in order to change the current business landscape and stop the deterioration of the environment and abuses and violations of human rights, including child labor.
The European Commission plans to provide a draft of the requested directive to EU member states by early 2022. This may lead in turn to Germany needing to amend its Supply Chain Due Diligence Act to be compliant with the new EU directive once it has been implemented. Meanwhile, we wait to see what the future holds for corporate social responsibility at a European level.