German Supply Chain Act makes corporate responsibility mandatory

Until the very last moment, it wasn’t clear whether or not the Act on Due Diligence in Supply Chains (in short: Supply Chain Act) would pass the German Bundestag in this legislative period. The CDU/CSU and SPD negotiating partners drove a hard bargain but finally managed to agree on a respectable compromise.

It was all accomplished in the penultimate week of the session. The supply chain law passed with a broad majority in the German parliament, including some opposition votes. Whether this rather awkwardly named law will achieve its aims, only time will tell. One thing is clear, however: Germany has pulled off a paradigm change, moving from the former voluntary approach towards mandatory corporate responsibility.

A major step forward

What is this law all about? What are its most important provisions? The law mandates companies to assume responsibility for their supply chains by complying with and protecting internationally recognised human rights, labour and environmental standards.

It establishes a mandatory due diligence process for companies in line with the UN Guiding Principles on Business and Human Rights, in general covering the whole supply chain. The law represents an important step towards a fairer globalisation. From 2023, companies with more than 3,000 employees will have to implement these due diligence processes in their business operations. From 2024, the threshold will be lowered to 1,000 employees. Subsidiaries and foreign branches are also covered. The law reinforces the prevention of human rights violations in the course of company operations. This entails that companies set up effective risk management, and either systematically for its own area of business and immediate suppliers (first part of the supply chain: direct partner/subsidiary), or as required for indirect suppliers (second and further parts of the supply chain), carry out risk analyses in order to identify hazards to people and the environment, and to prevent, end or minimise violations. In addition, companies now have to fulfil certain environment-related obligations along their supply chains. Public oversight is a particular feature of the new law. A mandated authority will monitor compliance with due diligence obligations and impose fines in the event of non-compliance. At the same time, this law will strengthen unions and employee participation by putting workers’ representatives in a position to inquire about due diligence procedures in their companies.

Room for improvement

The law is an important step towards more corporate responsibility, even though the Social Democrats and civil society organizations were unable to get their way on some points. For example, due diligence obligations shall apply only to a company’s own area of business and for direct, not indirect suppliers. Only in the case of so-called »substantiated information« – in other words, on the suspicion that something is amiss – are companies required to look at their entire supply chain. Also lacking is a civil law liability regulation, under which companies would be liable for damages caused by disregarding their due diligence duties. Environmental considerations are also marginalised, with no separate and comprehensive environment-related due diligence obligation. In a number of important areas, the regulations fall short of providing effective remedy and reparation for those affected, as well as securing their meaningful participation in the process.

Social Democrats are strong only in alliances

Even though the Social Democratic Party (SPD) would have liked to achieve more, it got as much as it could. In the final days of the negotiations, a number of improvements were introduced because the SPD was able to bring together a wide societal coalition in close consultation with Friedrich-Ebert-Stiftung, the German Trade Union Confederation (DGB) and civil society actors. The law was eventually made possible with a campaign involving many civil society organizations, trade unions and fair-trade shops, which exerted a lot of pressure and managed to repel attacks and smear campaigns on the part of business and employers’ associations.

Human rights and decent work in businesses and supply chains are a priority topic for FES. Together with its national and international partners, FES has repeatedly made the case for legislation on corporate responsibility. A first report was commissioned as early as 2015, discussing how and where regulations could be introduced. The fact that there now is a German supply chain act after all, is also not least due to FES-supported studies comparing international laws on corporate due diligence obligations and examining their efficacy.

No time for complacency

Some work remains to be done to implement human and labour rights in global supply chains. The focus is now shifting to a law on supply chains at the European level. The European Commission has announced a first draft for September. Again, European Social Democrats will have to forge broad alliances in order to be able to introduce standards for all companies in Europe.

FES, jointly with its partners, stands ready to play its part!