The German Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtengesetz; "LkSG") is effective from 1 January 2023 for companies and branches based in Germany with more than 3,000 employees, with further extension to companies with more than 1,000 employees from 1 January 2024. Although a German law, the LkSG also affects the business partners of German companies under the scope of the LkSG located beyond the country's borders. As Czech companies are often primarily export-oriented – with Germany being the most important market – many Czech companies are already affected. This number will further increase in 2024.
What is the LkSG about?
The LkSG addresses a wide range of sustainability-related, human (social) rights and environmental topics. These include prohibition of forced or child labour, noncompliance with occupational safety, discrimination, torture, violation of freedom of association, violation of environmental regulations such as the use of certain dangerous substances, export and import of particular dangerous waste, water or air pollution, harmful noise emissions, excessive water consumption, etc.
What are the obligations under the LkSG?
The LkSG requires the concerned German companies to make extensive compliance efforts, such as implementing a risk management system (Risikomanagement), appointing responsible persons, issuing a policy statement (Grundsatzerklärung), regularly performing a risk assessment (Risikoanalyse), implementing measures to prevent (Präventionsmaßnahmen), mitigating or removing negative consequences for sustainability not only internally and within its corporate group but also with its direct and indirect partners in the supply chain, taking remedial measures against adverse impacts (Abhilfemaßnahmen) and implementing whistleblowing processes (Beschwerdeverfahrens).
Which Czech companies may be affected?
The LkSG may affect a Czech company that is: (i) a member of a multinational corporate group with headquarters being the obligated person under the LkSG, or (ii) a direct or indirect supplier of products (goods) and/or services to the obligated person under the LkSG.
What may be the implications for the Czech companies concerned?
In the case of Czech companies that are members of the corporate groups concerned, good cooperation to fulfil all obligations under the LkSG is expected. This includes the fulfilment of risk management system obligations and the establishment of internal responsibilities, the conduct of risk analyses, the setting of preventive and corrective measures, the involvement in the internal reporting system, the provision of ongoing documentation of compliance and the submission of due diligence reports. In addition, such Czech companies will be required to ensure appropriate communication with direct and indirect suppliers in the Czech Republic.
Czech companies that are the direct suppliers of German obligated persons will have to be included within the policy statement, risk analysis and reporting system. Also, the obligation to prepare a code of conduct and to allow compliance audits is set for such direct suppliers. Finally, the LkSG provides for the possibility of terminating the business relationship with the direct supplier if the supplier refuses to provide the necessary cooperation.
Czech companies that are the indirect suppliers (subcontractors) of German obligated persons will have the right to participate in the reporting system of the German obligated persons. Additional obligations may arise if the obligated person obtains substantiated information that indirect suppliers may be in breach of human rights or environmental obligations. The obligated person would then have to carry out a risk analysis, implement appropriate preventive and control measures in relation to the indirect supplier, and develop and implement a plan to prevent, eliminate or minimise risks.
Given that the companies in the scope of the LkSG are, so far, only large companies (measured by the number of employees), it may be assumed that their bargaining power will be relatively high compared to that of its suppliers or customers based in the Czech Republic. In this context, Czech companies might see a large push from German companies to take over most of the obligations stemming from the LkSG and even commit themselves to obligations going beyond the scope of the LkSG.
It is therefore necessary for the Czech partners to exactly understand the scope of the LkSG and what is and what is not a reasonable requirement from the German companies. We will probably see a rise of sustainability or ESG-related clauses in contractual documentation and expansion of audit rights by the German counterparties.
LkSG compliance also brings a benefit to the companies in preparing them for likely EU-wide rules on supply chain due diligence. The Commission already adopted a proposal for a directive on corporate sustainability due diligence in 2022, which is in some aspects similar to the LkSG. Companies having their processes set up in compliance with the LkSG will therefore be one step ahead when and if the Directive becomes effective.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.