22 December 2022
On 1 January 2023, the German Act on Corporate Due Diligence in Supply Chains (Lieferkettensorgfaltspflichtengesetz, LkSG; full text) will come into force.
The law imposes far-reaching due diligence obligations on German companies, compliance with which is to be reported annually. However, not only German companies are affected; the law also indirectly affects the foreign suppliers of German companies.
The European Union plans to issue its own directive on the subject of the „supply chain“ next year. At the latest when this EU directive is implemented, as currently planned, the issue will not only be relevant for large companies.
Who is affected?
The LkSG affects all companies that have their head office, principal place of business, administrative headquarters or statutory seat in Germany and employ at least 3,000 workers in Germany. Also affected are companies with a branch office and at least 3,000 employees in Germany.
From 2024, the LkSG will already apply to companies with 1,000 employees.
Temporary workers are to be included in the calculation of the number of employees if the duration of the assignment exceeds six months. Within a group of companies, the employees of all group companies employed in Germany are to be taken into account when calculating the number of employees of the parent company; employees posted abroad are also to be included.
What is to be done?
The LkSG obliges the companies concerned to observe certain human rights and environmental due diligence obligations in their supply chains – in particular to report annually on their compliance.
The term „supply chain“ refers to all products and services of a company. It includes all steps at home and abroad that are necessary to manufacture the products and provide the services, starting from the extraction of raw materials to the delivery to the end customer, and covers a company’s actions in its own business, of its direct or indirect supplier.
For this reason, foreign suppliers are also indirectly affected by the LkSG.
The „own business“ covers every activity of the company to achieve the company’s objective. This includes every activity for the production and utilisation of products and for the provision of services, regardless of whether it is carried out at a location in Germany or abroad. Group companies are counted as parent companies if the parent company exercises a determining influence over them.
The due diligence obligations of the LkSG are:
- Establishment of a risk management system;
- Establishment of an in-house responsibility;
- Issuing a policy statement;
- Anchoring preventive measures within the own business unit and towards suppliers;
- Take corrective action;
- Establish a complaints procedure;
- Implementing risk due diligence with indirect suppliers; as well as
- Documentation and reporting.
All these due diligence obligations are described in more detail in the LkSG. The annual report on the fulfilment of due diligence obligations must be submitted electronically to the Federal Office of Economics and Export Control (Bundesamt für Wirtschaft und Ausfuhrkontrolle, BAFA) no later than four months after the end of a financial year. If the financial year is the calendar year, the deadline for submitting the first report is therefore 30 April 2024.
In the event of a breach of the due diligence obligations, the companies concerned face high coercive penalties and fines. The latter can amount to up to 2 percent of the global average annual turnover.
The European Union is expected to enact its own directive on due diligence in supply chains next year, the so-called Corporate Sustainability Due Diligence Directive (CSDD). If the CSDD is adopted as planned, companies with 500 employees and an annual turnover of 150 million euros or, in particularly „risky sectors“ (textiles, leather, agriculture, forestry, fishing and mining), 250 employees and an annual turnover of 40 million euros will be affected. Moreover, the current draft also provides for management liability. The issue of the supply chain is therefore not only a topic for large companies.
- Determine internal responsibility
- Establish or adapt risk management
- Conduct risk analysis
- Issue a policy statement
- Establish preventive measures in your own company and towards suppliers
- Take corrective action if necessary
- Set up complaints procedures
- Document all measures and report annually to BAFA
Further information and contact
Tim A. Fongern
E firstname.lastname@example.org | T +49 69 2573 75 354
Every effort has been made to ensure the accuracy of the information in this publication. No liability is accepted for the use or reliance on the accuracy of the information contained in this publication. The information in this publication is of a general nature and does not constitute legal advice.