Supply chain regulation made in Germany – a tentative step towards sustainability

By Anne-Christin Mittwoch, 8 March 2021

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Anne-Christin Mittwoch is Associate Professor at the faculty of Law, University of Marburg and Visiting Professor at the faculty of Law, Economics and Business, University Halle-Wittenberg

On 3 March 2021, the German Federal Government adopted a bill on global supply chain regulation (‘Act on Corporate Due Diligence in Supply Chains’ (available in German only)). The draft Act had been published only three weeks earlier after several month of intense debate, by the German Federal Ministry of Labour and Social Affairs. It had been eagerly awaited by academics and the public alike, in Germany and abroad. As the result of an internal power struggle between the involved federal ministries and the business community, the now proposed rules are a watered-down compromise rather than a definite step to secure human rights and other sustainability issues along global value chains. The German Parliament is now expected to vote on the final Act until the middle of the year.

Affected Companies: starting small, expanding later

The proposed Supply Chain Act is planned to have a staggered system for entering into force, with the first round starting on 1 January 2023. This is being criticised as a major weakness of the draft: in the first year its application will be limited to companies with more than 3,000 employees, which means that only around 600 German companies will be included. Thus, the draft exempts most companies from possible liability. In the second round, starting on 1 January 2024, the threshold will drop to 1,000 employees, increasing the number of affected companies to about 3000. Otherwise it will apply to all companies – regardless of their legal form – which have their headquarters, principal place of business or registered office in Germany. The employees of all affiliated companies in a group must be included in the calculation of the number of employees of the parent, even if an affiliated company is based abroad or has its head office or principal place of business there. This is to ensure that the parent companies are covered by the Act regardless of whether the employees are employed by the parent or the subsidiary.

Risk management and duty of care along the supply chain

A core obligation of the draft Act is the development of an appropriate risk management system. This is intended to identify risks of human rights violations as well as environmental risks along the supply chain and to prevent or stop violations. The focus however is clearly on the protection of human rights, not on the ecological dimension of sustainability. In order to identify relevant risks, an analysis must be carried out once a year to determine which human and environmental rights violations could be caused by the company's activities. The realization of such risks is to be prevented in particular through contractual control mechanisms or certain purchasing practices as well as through mechanisms of internal governance, like the appointment of a ‘human rights officer’. The draft Act also uses the instrument of reporting requirements by obliging affected companies to publish a ‘Human Rights Strategy’ and to continuously document its compliance with the general duty of care.

This general duty of care, the draft´s second core obligation, obliges companies to undertake human rights and environmental due diligence across their global value chains. The due diligence requirements are based on numerous international agreements, which the draft lists in an annex. These include the ILO Forced Labour Convention, 1930 (No. 29), the ILO Minimum Age Convention, 1973 (No. 138) and the Stockholm Convention on Persistent Organic Pollutants of 17 May 2004. To clarify companies’ duties, the draft formulates a number of examples of acts or omissions of businesses that could infringe the conventions referred to. Business associations criticise that the draft lacks a concrete definition of the general duty of care, increasing uncertainties and thus the risk of liability for companies. This criticism particularly relates to the requirement that companies are obliged to observe the human rights due diligence laid down in the draft ‘in an appropriate manner’. Business representatives want to know which measures are to be considered appropriate and in which cases they can exonerate themselves by referring to inappropriateness.

Sanctions and enforcement

‘The act is proportionate and will have an impact’, German development minister Müller concluded after the adoption of the bill by the government. For the envisaged impact, enforcement mechanisms and sanctions are crucial. In this respect, the draft posits a broad definition of the supply chain that at first glance determines a broad scope of the envisaged corporate liability: It covers all inputs used by a company to produce a product or provide a service, starting from the extraction of raw materials to the delivery to the final customer.

However, concerning obligations and sanctions the draft again pursues a graduated approach: its core obligations – like the duty of companies to develop a risk analysis – only apply to the affected companies themselves and their direct suppliers. Suppliers further along the supply chain are only included to a limited extent. For example, the draft Act requires that companies check on their indirect suppliers if trade unions or NGOs give them indications that human rights are being violated elsewhere along the supply chain. However, companies are only required to audit their direct suppliers. This raises questions concerning the effectiveness of the draft Act and will make it much more difficult to convince companies to develop and publish risk analyses along their entire supply chains. Such a clear limitation of responsibility is not in line with the UN Guiding Principles on Business and Human Rights (UNGPs). Principle 19 of the UNGPs instead sets out different factors like the company’s leverage on the entity concerned and the severity of the abuse in order to determine the appropriate action.

Companies’ compliance with the due diligence obligation will be monitored by an authority, the Federal Office of Economics and Export Control (BAFA). BAFA can require companies to provide information for use in the authority’s investigation. In individual cases BAFA can impose revenue-based fines or exclude companies from public tenders for up to three years. These are undoubtedly severe sanctions from the point of view of companies. However, victims of human rights violations or environmental damage still lack a basis for their own claim to compensation under civil law.

It remains to be seen in what form the draft Act will be adopted and what its effects will be. As it is now, it is a tentative but insufficient step towards more sustainable German businesses. To ensure a level playing field for business in Europe, the best bet may ultimately be to support strong and clear rules on the EU level.

Tags: Business and global value chains, Sustainability, Reform proposals, Daughters of Themis
Published Mar. 8, 2021 12:25 PM - Last modified Apr. 29, 2021 2:59 PM
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