A background to Lieferkettensorgfaltspflichtengesetz – the German Supply Chain Act
In the backdrop of growing human and environmental rights violations, the German legislature (and increasingly other countries) felt a need to shift from voluntary compliance to mandatory due diligence compliance. Accordingly, German Legislature passed Lieferkettensorgfaltspflichtengesetz, which translates to the Act on Corporate Due Diligence Obligations for prevention of Human Rights Violations in Supply Chain, or simply, the German Supply Chain Act (the “GSCA”). This enlists mandatory due diligence obligations on supply chain entities of German companies. India being a key supply hub with a large number of entities, directly or indirectly part of the global supply chain, the GSCA has wide ranging impact on such Indian entities.
Supply chain, as defined in the GSCA includes all steps within and outside Germany, that are necessary to produce a product or provide a service, starting from the extraction of the raw materials to the delivery to the end customer. This includes – a) the action of an enterprise in its own business area; b) the actions of direct suppliers; and c) the actions of indirect suppliers.
The GSCA provides for broad classification of environmental and human rights risks, which are provided below:
- Environmental Risks: a) Prohibition of manufacturing and using of mercury; b) Prohibition of treatment of mercury waste; c) Prohibition on production, handling, collection storage and waste disposal of prohibited chemicals; and d) Prohibition on exports and handling of hazardous waste.
- Human Rights Risks: a) Prohibition of child labour of any form; b) Prohibition of forced labour.; c) Prohibition of slavery; d) Prohibition of disregarding occupational safety and health obligations; e) Prohibition of disregarding freedom of association; f) Prohibition of unequal treatment / discrimination; g) Prohibition of witholding adequate living wages; h) Prohibition of environmental damages & excessive water consumption; i) Prohibition of unlawful eviction and taking of land, forest, and waters; j) Prohibitation of inappropriate use of security forces; and k) Act or omission in breach of the prohibitions listed here
GSCA: Key takeaways
- Applicability: Due diligence compliances under GSCA, shall be applicable on German based enterprises (with central administration, principal place of business, administrative headquarters, statutory seat, domestic branch in Germany) with: a) 3000 or more employees (from January 1, 2023); and b) 1000 or more employees (from January 1, 2024).
- Due diligence obligations: GSCA provides for nine mandatory due diligence obligations:
- Establishment of risk management system
- Designation of in-house responsible personnel
- Performance of regular risk analyses at own business premises, and at direct supplier's end
- Issuance of policy statements
- Laying down preventive measures
- Taking remedial actions whenever required
- Establishment of complaints procedure
- Implementation of due diligence obligations with regard to risks at indirect supplier's end
- Reporting and documenting due diligence compliances
- Applicable International Conventions – GSCA refers to a list of 11 internationally recognised human rights Conventions, and 3 (three) environment Conventions, thereby prohibiting the violation of the protected legal positions as laid out in these International Conventions.
- Penaltiesand fines - Fines (up to € 8 million); 2% of turnover (companies with yearly turnover >€400 million) and/or ban from participating in public contracts for 3 years.
- Civil liabilities - GSCA does not give rise to any liability under civil law, per se. However, the law introduces the possibility for victims (irrespective whether the employees are in Germany or any other country) of human rights violation to approach the German courts through trade unions and NGOs.
What this means for you?
- Widespread coverage: GSCA extends the due diligence obligations throughout the supply chain, and is not just limited to German Companies as it also includes direct and indirect suppliers (including Indian entities), who supplies are necessary to produce the final product or for the delivery of service.
- Applicability to Indian entities: GSCA shall be applicable to Indian companies if it is a joint venture or wholly owned subsidiary in Germany, meeting the threshold; or a supplier to an applicable enterprise.
- Miscellaneous impact:
- All vendors, suppliers, service providers of applicable German companies will be asked to comply with the requirements of GSCA.
- There will be board level scrutiny of non-compliances, and more importantly of “incidents”.
- Increased costs considering implementation of compliances, reporting, monitoring, risk mitigation, and insurance requirements.
- Exposure to fines and penalties (linked to turnover) for violation.
Risk mitigation steps considering GSCA:
- Active contract management is the key: Entities in the supply chain contract ought to constantly refer to provisions of contract throughout the term of engagement between the parties. It is essential to document all the due diligence compliances / requirements with clear obligations and responsibilities of the parties, to avoid the incidents resulting in non-compliance of GSCA's due diligence requirements.
- Seek expert advice: German entities can consider taking assistance of ESG lawyers in analyzing and understanding their gathered data, and to check if all compliances as required under GSCA are in place.
- GSCA awareness: German entities, will have to conduct various training programs to explain the suppliers about the provisions of GSCA along with its repercussions in the event of non-compliance.
- Prioritize compliance from supplier's end – Supply chain entities shall prioritize matters, such as regulatory adherence and governance, implementations of priorities, use of digital technology and analytics, and roadmaps for sustainable development in line with GSCA compliances.
- Compliance processes identification – Applicable entities need to adapt and update their risk, governance, and compliances processes for identification of Human Rights and Environment Risks, not just in their own business activities but also in their extended supply chain.
- Due diligence: German entities will have to conduct due diligence and Indian entities that form part of the supply chain will have to respond to due diligence questionnaires on all related issues.
- Remedial measures: Wherever risks are identified, German entities will direct, and Indian entities will have to remedy the risks by instituting appropriate measures to plug the gaps identified by the due diligence.
- Strict adherence to local laws - While complying with due diligence requirements as per the GSCA, Indian entities will have to adhere to Indian laws as most of the compliances of GSCA are driven by local laws.
Concluding remarks and expected outcomes:
By introducing the first of its kind mandatory due diligence compliance obligations vide GSCA, the German Government is trying to impose mandatory corporate social responsibility requirements on German entities and indirectly on the sub-suppliers / other foreign entities involved in supply chain network with German entity.
This phase wise implementation of the GSCA over eligible entities is expected to expand its scope and cover all German business entities in future, therefore, preparing the due diligence standards beforehand will keep the business entities resilient from negative impact due to sudden impositions of mandatory due diligence compliances.
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.