Consideration of voluntary initiatives in the context of supply chain regulation

published on 15 September 2022 | reading time approx. 6 minutes

Dealing with human and environmental rights in global supply chains has increasingly become the focus of government regulation in recent years. A consequence that essen­tially stems from the realisation that even addressing the issue at the level of the United Nations in the form of the UN Guiding Principles on Business and Human Rights and complementary approaches such as the OECD Guidelines for Multinational Enterprises, beyond their signalling effect, are hardly suitable to effectively solve the problem. The failure of voluntary supply chain compliance derived from this is demon­strated by representative examples from the textile industry. A realisation that, follow­ing the implementation of the National Action Plan for Business and Human Rights, prompted national legislators to introduce mandatory requirements for the observance of human rights and environmental standards in international supply chains in the form of the Act on Corporate Due Diligence Obligations for the Preven­tion of Human Rights Violations in Supply Chains (Lieferkettensorgfaltspflichtengesetz / LkSG).

• The United Nations Guiding Principles on Business and Human Rights as a common fixed point of state regulation and voluntary initiatives »

• Initiatives of voluntary self-regulation »

• Consideration and involvement of voluntary self-regulatory initiatives. »

• Outlook and notes »

Even before the law comes into force (1. January 2023), changes based on EU law requirements are already on the horizon. The reason for this is the proposal for a Directive on Corporate Sustainability Due Diligence presented by the EU Commission on 23. February 2022.

Notwithstanding, there are already numerous voluntary initiatives that actively address human rights and environmental grievances in global supply chains. The spectrum of such initiatives is diverse, including mere standards (e.g. ISO 26000), industry initiatives (e.g. amfori BSCI), so-called multi-stakeholder initiatives (e.g. Fair Wear), industry alliances (e.g. the Partnership for Sustainable Textiles) and companies' own codes of conduct.

The increasing introduction of binding regulations on human rights and environmental due diligence raises the question of the significance and location of such initiatives in the respective regulatory context – can the legal obligations be implemented by joining and implementing a voluntary initiative? What are the benefits of implementing voluntary initiatives?

The United Nations Guiding Principles on Business and Human Rights as a common fixed point of state regulation and voluntary initiatives

Under the heading of business and human rights, civil society, companies and politics have for some time been discussing a stronger perception of corporate responsibility in international supply chains. The discussion runs parallel to its presumed starting point in the form of globalisation. The underlying principle of the global divi­sion of labour implies – at least in theory – global welfare maximisation by exploiting comparative cost advan­tages. This principle is broken, however, if created values are obtained only at the end of the supply chain, while external costs arise at the beginning of the supply chains, e.g. through working conditions that violate human rights or harm the environment. Corresponding costs are often not considered in corporate calculations and reduce the welfare of the (foreign) production state. The central content of supply chain legislation there­fore is to find ways to internalise these external costs, i.e. to create compensation mechanisms or to prevent them in advance.

Approaches to binding regulation of corporate responsibility as well as voluntary initiatives already existed before the turn of the millennium. However, the (non-binding) UN Guiding Principles on Business and Human Rights from 2011 are considered to be groundbreaking. Today, they form the common point of reference for governmental regulatory approaches as well as voluntary initiatives. It therefore stands to reason that corres­ponding initiatives should be taken into account in the implementation of legal obligations.

Initiatives of voluntary self-regulation

The spectrum of voluntary self-regulation initiatives is diverse. The points of reference are regularly inter­na­tional standards, in particular the UN Guiding Principles on Business and Human Rights. They also serve as a benchmark for the OECD Guidelines for Multinational Enterprises. For the latter, there are already numerous sector-specific guidelines that concretise the general obligations for specific industries. As such, these merely serve as a reference point without containing a concrete verification mechanism (e.g. through audits). The same applies to ISO 26000, whose implementation – in contrast to many other ISO standards – cannot be certified. In other respects, too, the approaches to voluntary self-regulation diverge, without individual instruments always standing side by side in a clear-cut manner. Codes of conduct can not only originate from the pen of a company but can also be the expression of a specific industry association or a multistakeholder initiative. Consequently, they are regularly only one component of comprehensive due diligence concepts of such ini­tia­tives. The same applies to environmental and social labels, which are intended to communicate corresponding efforts to the outside world. If one looks at comprehensive initiatives, such as amfori BSCI or Fair Wear, differences regularly arise in the material standard, which is constituted from the human rights and/or environment-related protected goods and a corresponding due diligence concept. Specific sectors, products or raw materials are referred to. Furthermore, the question arises as to whether an (objective) review mechanism exists. Finally, there are differences in the involvement of stakeholders and the organisational structure (gover­nance). This ranges from an involvement that is at best considered within the framework of the company's own initiatives, to an involvement of parallel interest groups within the framework of sectoral initiatives, to an equal involvement of many stakeholders in so-called multi-stakeholder initiatives.

The significance of voluntary initiatives must therefore be considered in a differentiated manner – not least to avoid the impression of mere green – or bluewashing. In addition to the respective due diligence concept and the standard referred to, the organisational structure and the verification mechanism of the respective initiative therefore also play a special role.

Depending on the level of development and organisation of such initiatives, it proves advantageous that they already contain mature concepts for the implementation of sector-specific requirements of corporate due diligence – including extensive empirical values. In addition, the idea of comparative cost advantage, which characterises globalisation, is also taken up by them; the joint implementation of corresponding due diligence obligations proves to be more cost-effective than individual implementation. This is an argument that cannot be dismissed, especially for the small and medium-sized enterprises (SMEs) that are (directly) included in the scope of application in the EU Commission's proposal – after all, the (comprehensive) establishment of corres­ponding compliance structures involve not inconsiderable costs.

Consideration and involvement of voluntary self-regulatory initiatives.

Against this background, the question arises as to how the Act on Corporate Due Diligence Obligations in Supply Chains and the EU Commission's proposal relate to the issue of integrating voluntary initiatives.

Act on Corporate Due Diligence Obligations in Supply Chains (Lieferkettensorgfaltspflichtgesetz/LkSG)

The consideration of voluntary initiatives is hardly included in the Act on Corporate Due Diligence Obligations in Supply Chains. Only section 7 para. 2 no. 2 LkSG mentions as a remedy to be considered in the case of violations of protected legal positions that have already occurred, the association with other companies within the framework of industry initiatives and industry standards in order to increase the possibility of exerting influence on the perpetrator. Voluntary initiatives can also be taken into account within the framework of the complaints procedure pursuant to section 8 para. 1 sentence 6 LkSG.

The Federal Ministry of Labour and Social Affairs (BMAS) points out that seals, certificates or audits, insofar as they demonstrably fulfil the legal due diligence requirements, can serve as important indications for the ful­fil­ment of the due diligence requirements of the Act on Corporate Due Diligence Obligations in Supply Chains. It is also expected that further guidance will be provided by the Federal Office of Economics and Export Control (BAFA) as part of the cross-industry or industry-specific information, assistance and recommendations on compliance with the requirements of the Act on Corporate Due Diligence Obligations in Supply Chains to be developed pursuant to section 20 LkSG.

In contrast, the considerations in a cornerstone paper for the draft supply chain law from 2020 were much more extensive. According to this, companies that join and implement a state-recognised (industry) standard should be able to limit their civil liability to intent and gross negligence. The prerequisite for recognition was that the standard covered the entire supply chain, considered all core elements of due diligence, and was developed within the framework of a multi-stakeholder process. However, during the legislative process, civil liability has been limited to tort claims based on general principles, without addressing the relevant question of applicable law.

Still, it remains to be seen whether a corresponding regulation on the consideration of voluntary initiatives could be introduced in the foreseeable future against the backdrop of EU law requirements for the introduction of civil liability, including its design as a so-called mandatory provision (see below). So far, therefore, the consi­deration of voluntary initiatives to fulfil the due diligence obligations of the LkSG has mainly been from the perspective of due diligence obligations as such of a public law nature.

Proposal of the EU Commission for a Directive on Corporate Sustainability Due Diligence

In principle, the EU Commission's proposal Directive on Corporate Sustainability Due Diligence is similar to the Act on Corporate Due Diligence Obligations in Supply Chains with regard to the inclusion of voluntary initia­tives. The proposal does not contain a comprehensive inclusion of voluntary initiatives. It should be noted that the EU proposal assumes a significantly broader scope of application, also covering SMEs operating in indus­tries with high damage potential (Art. 2 para. 1 b) of the EU proposal). Furthermore, according to Art. 22 of the EU proposal, the member states are obliged to introduce civil liability and ensure its applicability in national law.

Against this background, the introductory considerations of the EU proposal should be emphasised: „This Directive allows for company cooperation, use of industrial schemes and multistakeholder initiatives to reduce the cost of compliance for the companies with this Directive.“ (P. 17 of the EU proposal)

The inclusion of voluntary initiatives, comparable to the Act on Corporate Due Diligence Obligations in Supply Chains, is addressed in connection with the increase of a company's possibilities of exerting influence on direct and indirect business partners (recital 37 of the EU draft). In addition, it is to be expected that the EU Commission will take voluntary initiatives into account in guidelines within the meaning of Art. 13 of the EU proposal and that these will be given increased attention within the framework of the accompanying measures to be taken according to Art. 14 of the EU proposal.

Outlook and notes

So far, there is no comprehensive regulation on the integration of voluntary initiatives, neither in the Act on Corporate Due Diligence Obligations in Supply Chains nor in the EU proposal for a Directive on Corporate Sustainability Due Diligence. However, both sets of rules emphasise in principle the integration of voluntary initiatives for the implementation of corporate due diligence in global supply chains. This is supported in particular by the fact that such initiatives, e.g. from the textile industry, can already draw on a wealth of experience, as well as by the fact that cooperation in a specific industry favours comparative cost advantages.
In fact, there are already regulations at the EU level that contain a direct integration of voluntary initiatives. The sector-specific regulations on trade in so-called conflict minerals and on timber each contain a mechanism for recognising existing initiatives to implement or monitor the respective due diligence obligations. In both cases, it is also guaranteed that the corresponding initiatives will be regularly reviewed. In addition, the formal integration strengthens legal certainty and the trust of individual market participants in such initiatives.

For SMEs in particular, the formal integration of voluntary initiatives in the implementation of (future) due diligence could help to provide more legal certainty. However, even without direct consideration, it is possible in principle to fulfil due diligence obligations by means of voluntary initiatives.