A new German regulation, known as the Supply Chain Due Diligence Act, will take effect in January 2023 and will apply to enterprises operating or dealing in Germany. The law makes it legal for companies to address social and environmental challenges in their supply chains through more ethical corporate governance.
Scope of the Act
- Any UK company with more than 3,000 employees in Germany will be affected by this rule. This covers all employees of a parent company's subsidiaries and firms who work in Germany, as well as employees who are normally based in Germany but are presently working overseas and temporary workers with contracts of more than six months.
- Companies with more than 1,000 employees will be subject to the regulation beginning in 2024.
Businesses in the Act's scope should begin preparing now to guarantee they are ready when it takes effect on January 1, 2023. The Act compels businesses to demonstrate that they are taking steps to pinpoint any negative effects their operations may have had on people and the environment. Failure to comply with the legislation could result in heavy fines of up to 2% of global turnover, as well as a three-year ban from bidding on public contracts in Germany.
Businesses may take a few essential steps in the next months to adapt to an upcoming law and assist their progress with a data-driven strategy.
Evaluate the Risks and Consequences of your Vendors
Companies can begin evaluating their supply chains to determine the social and environmental risks and impacts they must address. German Act emphasizes the concerns to look for and mandates enterprises to examine their own procedures as well as their entire supply chain, including raw material producers.
Because supply chain risks are always changing, firms should do risk assessments at least once a year. Technology can help with this; for example, a data-driven screening system can let a company swiftly assess and evaluate hazards across a global supply chain. These technologies leverage data on suppliers' locations, activities, and workforces to draw attention to social and environmental issues.
In order to identify all of the social and environmental issues that need to be addressed and develop a due diligence program, companies can get external assistance.
Due Diligence Activities
The Act identifies steps that firms must undertake in order to avoid or mitigate undesirable consequences. Companies should make some actions a regular component of their activities and reflect on them once a year, including their success and any negative consequences.The activities can include;
- Risk Control
- Preventative Actions
- Redressal Method
- Documentation and Evaluation
- Due Diligence Report
- Get Ready for Additional Responsibilities
Businesses can establish a system to assess and deal with risks identified in their operations and supply chain.
Measures can be taken to mitigate dangers that may include implementation of appropriate logistics operations, educating employees on labor rights, and auditing suppliers to ensure that they are adhering to all applicable laws.
People should be able to report social and environmental issues or incidents relating to the acts of any business in a company's supply chain, including indirect suppliers. Considering this, companies must provide an internal complaints system for your company's employees and suppliers, where people can safely and confidentially submit feedback.
Businesses can keep a file where they can document due diligence activities and can monitor them for at least seven years.
Companies are required to prepare an annual report detailing how they address social and environmental challenges in their supplier networks. The report must include issues that were recognized, methods that were established, and activities that were completed in the preceding fiscal year. It should also include the company’s evaluation of their initiatives’ success and their key findings. Companies must submit the report to the German Federal Office for Economic Affairs and Export Control (BAFA) within four months of the end of their fiscal year and make it publicly available on their websites.
The German government is expected to release all of the Act’s specific. We propose that companies keep an eye out for any news about the Act so that they can respond quickly and prevent any consequences.
