We are in a period of rapid change for supply chain due diligence, brought about by a powerful combination of investor focus on ESG factors, rising consumer demands for sustainable products backed by increasing scepticism of ‘greenwash’, and an upwards trend in Government regulation.
Germany is the latest country to legislate for increased corporate responsibility over global supply chains. We have teamed up with product law specialists Produktkanzlei to look at the German legislative measures, and how they compare with its UK equivalent, the Modern Slavery Act 2015 (our detailed coverage of the Modern Slavery Act 2015 can be found here).
On 25 June 2021, after the German Bundesrat has given it’s vote on 11 June 2021, the German Bundesrat adopted a draft bill of the Supply Chain Due Diligence Act (Gesetz über die unternehmerischen Sorgfaltspflichten in Lieferketten following the recommendations by the responsible committee in the document BT-Drs. 19/30505) implementing human rights and environmental due diligence obligations within supply chains for large businesses. The initial scope of the Act will, starting from 1 January 2023, cover companies with 3,000 employees or more and from 2024, the threshold will be lowered to companies with at least 1,000 employees. The bill focuses on human rights in the same way as the Modern Slavery Act, but has a broader scope, including reference to environmental risks.
Key obligations
Risk management and prevention
Under the German Act, companies must carry out an annual comprehensive risk analysis of the supply chain (in addition to any incident-led risk analyses), considering the prescribed list of risk areas including: child labour, discrimination, problematic working conditions, occupational health and safety and environmental damage. With regard to the environment, there are two distinct categories of impact. The German Act prohibits causing harmful soil contamination, water or air pollution, harmful noise emission or excessive water consumption, in cases where these actions substantially impair the natural basis for the preservation and production of food, deny a person access to safe drinking water, impede or destroy a person's access to sanitary facilities or harm a person's health. However, violations of the Minamata Convention on mercury, the Stockholm Convention on persistent organic pollutants and the Basel Convention on the control of transboundary movements of hazardous wastes and their disposal, are considered to be environmental risks regardless of their impact on human rights.
The analysis must take into account all sites and processes within a company and those of immediate suppliers, with indirect suppliers being reviewed only in case of substantial knowledge about a human rights or environmental violation. The results of the analysis should be communicated by the responsible person within the company, typically the appointed Human Rights Officer (“HRO”), to key individuals within the business including the board of directors and procurement team.
Based on the outcomes of the risk analysis, the German Act stipulates that companies undertake appropriate preventative measures such as issuing a policy statement, providing training and updating training materials, carrying out more in-depth audits and reviewing supplier contracts. The preventative obligations are determinable by each company on a case-by-case basis depending on the type and scope of the company's business activities and the level of risk.
In the UK, it is not compulsory for any risk management or prevention steps to be taken at all, the obligation is only for the transparency statement to be published setting out what (if anything) has been done. The Modern Slavery Act guidance does not prescribe the form of the statement but does suggest that it include the steps the organisation has taken during the financial year to ensure that slavery and human trafficking is not taking place in any of its supply chains, including mitigating actions taken by the business. There is no requirement for a HRO to be appointed, however an appropriate senior person in the business (generally a director) must sign the statement before its publication.
Remedial measures and grievance procedure
The German Act requires immediate action to be taken in the event of an infringement being found. The infringing company is compelled to take remedial measures to rectify any breaches. For immediate suppliers, the appropriate remedial measures must include a process advising them on how to minimise the infringements. This might be reached by a joint action plan and the implementation of business initiatives which increase the company’s influence on the supplier in question. Termination of a business relationship is a last resort in exceptional cases where there are serious violations involved and where there are no other measures to minimise or end the infringement.
The German Act provides for an obligatory grievance procedure which must be open to everyone and the underlying procedural rules and options to access the procedure must be in writing and publicly available. The company must confirm receipt of information received by whistle-blowers and there will be an obligation to discuss the notified facts with the whistle-blower. Note that it is not compulsory to implement an internal grievance mechanism: it is permissible to join an external mechanism instead.
There are no obligations under the UK’s Modern Slavery Act to remedy risks found in a supply chain. Instead, the UK guidance recommends that businesses respond according to the circumstances, this may include contacting local government, law enforcement, or reconsidering commercial relationships with suppliers.
Reporting requirements
The German Act includes annual reporting requirements, whereby companies are required to report publicly and to the Federal Office for Economic Affairs and Export Control (BAFA) the actual and potential negative impact of their business activities on human rights and the environment and the measures they have taken and will take.
This reporting requirement is most akin to the UK’s transparency statement as noted in the sections above. Although there is no requirement to include the negative impacts of their business activities in the statement, UK businesses are encouraged to be as open and transparent as possible within their statements.
Environmental impact
The German Act does reference environmental risk factors but only with a relatively narrow scope. This has led to some backlash from environmental groups who claim that environmental damages such as climate change and marine pollution are not fully covered by the law. However, a broader inclusion of environmental aspects on EU level is planned within the current draft of the EU Value Chain Directive.
The UK’s Modern Slavery Act also does not include reference to environmental or sustainability risks, however, both the UK and Germany have adopted the EU Non-Financial Reporting Directive which prescribes that certain large companies publish information relating to their environmental impact and governance mechanisms. In addition, the UK government has announced a legislative proposal for supply chain due diligence for certain “forest-risk” commodities that goes beyond current regulations such as Regulation 995/2010, through which large businesses would face substantial fines if they cannot prove that their supply chains are not linked to illegal deforestation. There are still many questions raised by this proposed legislation. However, it demonstrates movement towards increased scrutiny of supply chain processes for environmental impacts across Europe and beyond.
Liability
Under the German Supply Chain Act, a company would be liable for a failure to comply with its due diligence obligations with sanctions such as fines of up to EUR 8,000,000 or in certain cases 2% of annual turnover and up to three years’ exclusion from public contracts if a certain level of fine has been imposed. The final approved version of the Act explicitly excludes direct civil liability based on the Act, however, it leaves the possibility open to claim compensation based on other sources (in particular Art. 4(1) of Regulation (EC) No 864/2007 (Rome II)).
In the UK, if a business fails to produce a slavery and human trafficking statement for the financial year, the Secretary of State may seek an injunction through the High Court requiring the organisation to comply. Despite the threat of this type of action, in reality, failure to comply with the provision or a statement that an organisation has taken no steps in relation to supply chain due diligence, will most likely only lead to the reputational damage of the business. However, the UK government has recently confirmed its intention to introduce civil penalties for non-compliance with transparency obligations under the Modern Slavery Act.
Conclusion and forecast
The comparison between the German Supply Chain Due Diligence Act and the UK Modern Slavery Act 2015 clearly shows that the scope of the German Act is, in nearly every respect, broader than the UK Act. This means that companies which already comply with the UK Act are not automatically in compliance with the German Act. However, of course, the measures taken under the UK Act may well serve as the basis for compliance in Germany.
Currently, there are similar legislative proceedings taking place in numerous European countries, as well as at EU level. Therefore, companies will face increasing regulation in the field of supply chain human rights and environmental compliance and therefore should start to prepare.
How can Burges Salmon and Produktkanzlei help?
Burges Salmon and Produktkanzlei often work together to bring our collective experience on supply chain due diligence regulation in the UK, in Germany and across the EU Single Market. We advise clients on bespoke compliance strategies and work with other experts across the globe to provide comprehensive advice across many jurisdictions. If you would like to discuss these issues further, please contact us.