German Supply Chain Law and its impact on international business models in Asia-Pacific

last updated on 5 May 2022  | reading time approx. 5 minutes

The objective of the law is to improve protection of human rights in global supply chains. The government draft states in an explanatory section that due to their strong integration into global sales and procurement markets, German companies are particularly confronted with human rights challenges in their supply chains.

• Risk assessment »

• Report on the fulfilment of due diligence obligations »

• Sanctions for non-compliance »

• Underlying guiding principles »

• Assessment of the effects »

• Protected legal positions »

Risk assessment

This would apply in particular to economically significant sectors such as the automotive industry, mechanical engineering, the metal industry, chemicals, textiles, food and luxury goods, wholesale and retail, the electronics industry and energy suppliers. Global procurement and sales markets harbor risks due to lack of transparency and the often inadequate enforcement of internationally recognised human rights in the supply chain. This results in an expectation of the government for companies, with reference to their size, industry and position in the supply chain, to adequately identify, address and report on human rights risks in their supply chains. To achieve this objective, companies will have due diligence obligations, particularly in the fields of human rights, labor standards and environmental issues. This involves risk analysis, preventive measures, remedial measures, documentation & reporting obligations as well as structural measures, which include risk management including deployment of a human rights officer, policy statement and grievance mechanism.

Report on the fulfilment of due diligence obligations

Companies shall prepare an annual report on the fulfillment of its due diligence obligations in the previous financial year. The report shall at least state in a comprehensible manner

• whether and, if so, which risks the company has identified,
• what the company has done to fulfill its due diligence obligations with reference to the measures; this also includes the elements of the policy statement,
• how the company evaluates the impact and effectiveness of the measures, and
• what conclusions it draws from the evaluation for future measures.

The report shall be made publicly available free of charge on the company's website for a period of seven years no later than four months after the end of the financial year. The report shall be submitted in German and electronically via an access point provided by the competent authority, i.e. the Federal Office of Economics and Export Control (BAFA), no later than four months after the end of the fiscal year to which it relates.

Sanctions for non-compliance

Sanctions for non-compliance with the due diligence obligations include fines ranging from 100,000 to 800,000 Euros; from 400 mio. Euros worldwide annual turnover, companies can face fines up to 2 per cent of the average annual turnover. In addition, companies risk exclusion from award of public contracts and civil liability, particularly as legal representation for domestic NGOs and trade unions is permitted.
  

Underlying guiding principles

The draft government bill makes references to several UN guiding principles, i.a. OECD Due Diligence Guidance for Responsible Business Conduct and UN OHCHR Interpretive Guide on the Corporate Responsibility to Respect Human Rights. Although the implementation of the Supply Chain Act is still unclear to some extent, we can consider these UN guidelines to understand emerging good practices that should be built upon and scaled up in order to address gaps in current operations and discuss contents of human rights due diligence. Involvement with adverse human rights impacts can occur in three basic ways, as a business enterprise may

• cause the impact through its own activities,
• contribute to the impact through its own activities – either directly or through a third party (Government, business or other), or
• be involved because the impact is caused by an entity with which it has a business relationship.

The corporate responsibility to respect human rights refers to internationally recognised human rights – understood, at a minimum, as those set out in the International Bill of Human Rights (consisting of the Universal Declaration of Human Rights and the International Covenant on Economic, Social and Cultural Rights and the International Covenant on Civil and Political Rights) and the International Labour Organization’s Declaration on Fundamental Principles and Rights at Work.

Assessment of the effects

For the process of assessing impacts, the business enterprise should e.g. take into account the nature and context of the operation and undertake meaningful consultation with potentially affected individuals (workers, communities, consumers) as well as other relevant stakeholders (e.g. trade unions and NGOs with particular expertise on relevant issues and contexts), as appropriate to the size of the business enterprise and the nature and context of the operation. In order to assess involvement in human rights impacts beyond first tier business relationships, companies would require or set incentives for immediate/first tier business partners to carry out their own assessments and require the same from their suppliers and business partners. According to the Supply Chain Law, appropriate preventive measures against a company with which a contractual relationship exists or is in the process of being established include, in particular, the consideration of human rights-related expectations in the selection of contractual partners, the obligation of the contractual partner to appropriately address identified human rights risks in its business area as well as along its supply chain, the stipulation of appropriate contractual control mechanisms as well as training and further education to enforce the contractually stipulated expectations, the implementation of risk-based control measures to verify compliance with the human rights strategy at the immediate supplier. This appropriateness of the company's actions is legally determined by the type and scope of its business activities, the company's ability to influence the direct perpetrator of the violation of a protected legal position or an environmental obligation, the severity of the violation that can typically be expected, the reversibility of the violation, and the probability of the violation of a protected legal position occurring.

The guidelines suggest a focus on risks that the enterprise’s operations pose to human rights, i.e. potential and actual adverse impacts on people’s rights and dignity. This involves assessment of potential and actual impacts throughout the business enterprise (both headquarters and subsidiaries) as well as those directly linked to its operations, products or services by business relationships.

Protected legal positions

Human rights within the meaning of the Supply Chain Law are those arising from the conventions listed in numbers 1 to 11 of the Annex to the Law. Protected legal positions are, in particular, life, health, just and favorable conditions of work, an adequate standard of living, child protection, freedom from slavery, servitude, forced or compulsory labor, freedom of association and the right to collective bargaining, protection against torture and cruel, inhuman or degrading treatment. For the purposes of the Supply Chain Law, environmental obligations are those aimed at protecting the environment and human health from the negative consequences of mercury emission and from the negative consequences of persistent organic pollutants.

In the following country chapters we made local red flag case considerations that may help to raise awareness of the risks companies face with supply chains in ASEAN, China and India.