Starting with January 1, 2023 having a solid sustainability strategy for your supply chain has become a business imperative for German companies. Failing to comply with the due diligence obligations for human rights and environmental standards could result in financial losses, harmed reputation, and even hinder a company’s ability to operate in Germany.
The German Supply Chain Due Diligence Act (The German Act on Corporate Due Diligence Obligations in Supply Chains or SCDDA), known in German as the Lieferkettengesetz (Lieferkettensorgfaltspflichtengesetz or LkSG) marks a significant moment in ESG (environmental, social, and governance) accountability. The SCDDA Act primarily emphasizes the social aspect of ESG, but it also acknowledges the connection between environmental risks and their adverse effects on human health within supply chains.
The SCDDA mandates that companies adhere to international agreements, such as the Minamata and Basel Conventions, that address environmental risks (see annex below for a list of environmental risks that SCDDA applies to). This includes limiting the harmful impacts of pollutants, toxic chemicals, and hazardous waste during their handling and disposal.
What is the German SCDDA or Lieferkettengesetz?
SCDDA or LkSG requires businesses to identify, prevent, and address human rights and environmental violations within their own and their third party suppliers’ operations. The act came into force on January 1, 2023 and it comes with a comprehensive list of requirements, including the establishment of a risk management system for compliance, preventive and remedial measures, and mandatory complaint procedures. It aims to reduce human rights abuses and environmental harm in German companies’ supply chains, while ensuring compliance with labor standards and collective bargaining agreements. The law mandates regular documentation and reporting, and violations are subject to substantial fines (as mentioned below).
What do organizations need to do to comply with SCDDA (Lieferkettengesetz)?
Organizations must monitor and address violations within their own operations and those of their direct suppliers, from the extraction process of raw materials to the delivery of goods to customers, regardless of where the activity occurs. Additionally, if an organization becomes aware of a potential violation of environmental standards or human rights by one of its indirect suppliers, it must immediately conduct a risk analysis of the potential violations.
Basically the SCDDA means that supply chains now require the same level of attention as financial performance. Failure to be aware of upstream activity could lead to severe reputational, investor, and financial risks. Find out more details in this FAQ on SCDDA from the Federal Ministry of Labour and Social Affairs.
Which companies have the obligation to comply with SCDDA (Lieferkettengesetz)?
Starting January 2023, the German Supply Chain Due Diligence Act applies to companies based in Germany with over 3,000 employees or German-registered branches of foreign companies with over 3,000 employees. This means approximately 600 companies in Germany.
Starting January 2024, the Act will expand to apply to companies based in Germany employing over 1,000 employees or German-registered branches of foreign companies with over 1,000 employees. This means approximately 2,900 companies will need to be SCDDA compliant.
What human rights risks does SCDDA (Lieferkettengesetz) apply to?
SCDDA defines this as “a situation in which there is a sufficient degree of probability based on factual indications that a violation of one of the following prohibitions will occur”. Here is a list of criteria to monitor:
- Employment of a child of 15 years or younger
- Child labor of children under 18
- Forced labor
- All forms of slavery or similar practices of domination or oppression at work
- Disregard of the local applicable rules on workplace safety and working conditions if this could lead to workplace accidents or work-related health risks
- Disregard of freedom of association
- Employment discrimination
- Wage discrimination
- Causing harmful changes to the soil, polluting water, polluting air or causing harmful noise emission
- Acquiring, developing or otherwise using land, forest or water from unlawfully evicting persons from or depriving them of the use of such land, forest or water
- Commissioning or using private or public security forces to protect a business project if the security forces will infringe the prohibition on torture, harm life or limb, or interfere with freedom of association and the right to collective bargaining
- Actions or inactions that are directly capable of infringing a protected legal interest
What are the consequences of non-compliance with SCDDA (Lieferkettengesetz)?
Companies can face fines of up to EUR 8 million, or up to 2% of their average annual turnover, if they have an average annual turnover of over EUR 400 million. Violating companies can be excluded from winning public contracts in Germany for up to three years. Trade unions and NGOs may be granted the authority to conduct litigation on behalf of an affected party. The Federal Office for Economic Affairs and Export Control (BAFA) has been granted effective enforcement powers to monitor companies' supply chain management and can act on its initiative or at the request of an affected person.
Monitoring the news for SCDDA (Lieferkettengesetz)
With SCDDA in place it is crucial to proactively scan the horizon in order to spot potential issues, and move to mitigating their effects as quickly as possible.
One of the easiest ways to stay on top of the ESG risks highlighted by the SCDDA is by constantly monitoring the news for information that might indicate issues with your business or your suppliers and partners.
That’s where applying machine learning and natural language processing (NLP) to the vast amounts of data created by the global media ecosystem comes in. Products like a News API or a news monitoring UI, such as RADAR, detect anomalous signals in this data relevant to a wide variety of specific ESG topics, and enable the organization to drill down into articles from local, national, and international sources (over 80,000 global sources) to understand precisely what is happening. By doing so, an organization is able to identify risk early on and shift their efforts to mitigating it. AYLIEN gives you the ability to monitor not just your business, but any number of organizations, so that you can be sure you will cover your entire supply chain.
Find out more about AYLIEN's News API or our research platform for analysts, RADAR, and request a free trial to see how easy it is to monitor and report your ESG landscape in order to comply with SCDDA.
Environmental risks that the German Supply Chain Due Diligence Act applies to:
- Manufacture of mercury-added products
- Use of mercury or mercury compounds in manufacturing processes
- Handling of mercury waste
- Production and use of chemicals
- Non-environmentally sound handling, collection, storage, and disposal of chemical waste
- Export of hazardous wastes and other wastes
- Import of hazardous wastes and other wastes from non-state parties of the Convention
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