Supply chain law: What companies need to know

On March 3, 2021, the German federal cabinet passed the draft of a national due diligence law. adelphi played a significant role in the consultation and research on corporate due diligence in supply and value chains. The new law represents a critical first step, and now additional action must follow in order to establish effective corporate due diligence for the long term.

At the end of February, Labour Minister Hubertus Heil, Development Minister Gerd Müller and Economics Minister Peter Altmaier announced an agreement on a national supply chain law. The corresponding draft of a ‘law on corporate due diligence in supply chains’ was passed by the federal cabinet on March 3.

As of 2023, the law will apply to companies with over 3,000 employees; in 2024, it will expand to include companies with over 1,000 employees. Affected companies are obliged to adopt a declaration of principle on respect for human rights, carry out a risk analysis, set up a risk management system (including remedial measures and a complaint mechanism) and report publicly on these actions. Remedial and preventive measures are aimed at violations. The law focuses on the business relationship between a company and its direct suppliers. The bill provides for an event-related duty of care for indirect suppliers.

adelphi played a role in the development of the due diligence law with consultation and research

The industry study ‘Die Achtung von Menschenrechten entlang globaler Wertschöpfungsketten’ (Respect for Human Rights along Global Value Chains), prepared by adelphi and EY on behalf of the Federal Ministry of Labour and Social Affairs, examined human rights risks along the value chains of branches of the German economy. Based on this, the study narrowed its focus to eleven key industries using specific criteria. Among other things, the project examined the degree of international interdependence of various German industries, making an explicit contribution to the assessment of compliance costs for the German economy as a result of the supply chain law.

As a member of the consortium, adelphi was also involved in the NAP monitoring: the think tank helped determine to what extent companies affected by the National Action Plan on Business and Human Rights (NAP) have complied with their due diligence obligations in the period from 2018 to 2020. The final report revealed that only 13 to 17 percent of these companies had implemented all five NAP core requirements – well short of the target goal of 50 percent. According to the coalition agreement, the due diligence act is the legal consequence of this result.

For the first time, the draft law clearly defines corporate due diligence obligations in the supply chain and makes them legally binding. This is an important step on the path to more sustainable supply chains.

What will happen in the next few months?

A European approach to corporate due diligence in global supply chains

The due diligence act is to be passed by the German Bundestag before the parliamentary summer break. At the same time, things are moving forward at the European level. At the end of January, the European Parliament’s Committee on Legal Affairs published an initiative report that sets out the core content of a possible European law. The plenary session in the EU Parliament is expected to vote on the report in March. Meanwhile, the European Commission has also announced its own proposal for a European supply chain law for June 2021. EU Commissioner for Justice Didier Reynders recently stated that this proposal aims to go beyond the German draft law when it comes to corporate due diligence requirements. Among other things, he indicated that an EU supply chain law would affect all companies – regardless of the number of employees – and would cover the entire supply chain. In addition, criminal penalties could be introduced in the event of violations.

Both initiatives clearly show that the EU is willing to go further than Germany. They also make clear that companies are well advised to deal with the topic of corporate due diligence comprehensively, and to understand and inventory their entire supply chain.

In order that the legal regulations contribute to the protection of human rights and the environment in global supply chains and that companies receive support and are able to meet their responsibilities, we believe that businesses and legislators should consider and implement the following points.

Suppliers need targeted support on their way to corporate due diligence 

As part of the implementation of the supply chain act, affected companies will place specific demands on their direct suppliers so as to comply with due diligence obligations. This will also affect many smaller companies in Germany. These businesses must receive support for the implementation of these requirements.

In this context, adelphi developed the due diligence compass on behalf of the Gesellschaft für Internationale Zusammenarbeit (GIZ) and the Agency for Business and Development (AWE). The compass helps smaller companies in particular implement the concept of entrepreneurial diligence in a step-by-step manner.

The industry study ‘Respect for Human Rights along Global Value Chains’ also highlights the potential to develop targeted support for the implementation of corporate due diligence at the industry level. In order to identify the major risks of violations of human rights and environmental protection in the supply chain, an analysis of ‘hotspots’ is essential. Industry associations can help companies and suppliers with targeted, industry-specific risk analyses and measures. To adequately ensure the duty of care when there are indications of grievances, companies must establish smooth information flows within supply chains – for complaint mechanisms, for example. Here, too, industry initiatives play a central role: they can provide uniform strategies for complaints, training options and platforms for best practices in their industry.

A holistic approach to corporate due diligence and sustainability

The draft of the due diligence act focuses mainly on the protection of human rights. It only mentions environmental issues if they are directly related to the observance of human rights.

However, the ‘Atlas on Environmental Impacts: Supply Chains’, created by adelphi and Systain Consulting on behalf of the Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (BMU), demonstrates that most environmental impacts occur in the supply chain, from raw material extraction to the individual processing stages, to the direct suppliers. In particular, CO2 emissions that drive climate change are largely caused there: the greenhouse gas emissions in the supply chain of vehicle construction, mechanical engineering and food production are around ten times higher than at the company’s own locations in Germany.

For this reason, adelphi is doing research with Systain Consulting and Schweizer Legal on behalf of the Federal Environment Ministry on how companies can implement environmental care requirements through integrated sustainability management. The project, ‘Innovative Tools for Environmental and Sustainability Management in the Value Chain’, focusses on a shared approach to environmental and human rights-related sustainability aspects and how to address them in sustainability management.

The common goal of the current developments in politics and business is clear, despite different views in terms of execution: integrate due diligence into corporate strategies along the entire supply chain. adelphi will continue to actively support this process through consultation and research as well as through collaboration with associations and companies.