Who does the German Supply Chain Act affect and how should it be implemented?

Since January 1, 2023, companies in Germany with more than 3,000 employees have been legally obligated to do due diligence with regard to the supply chain. The goal of this new regulation is to improve supply chain transparency and respect for internationally recognized human rights. As of January 1, 2024, the threshold for affected companies will fall to 1,000 employees.

In the event of violations of the LkSG, for example due to lacking preventive measures, companies face significant financial penalties depending on their annual sales. With the adoption of the LkSG, the German government is writing a new chapter on corporate due diligence.

However, the impact and scope of this new legislation is enormous and presents new challenges for companies.

According to the German government, the law affects around 900 German companies. From now on, they must comply with human rights due diligence obligations and observe prohibitions. Among other things, this concerns compliance with human rights standards, such as the prohibition of child labor and forced labor. In addition, environmental requirements and duties must be observed, such as the ban on the export and import of hazardous waste.

For the first time, the law lays down clear requirements for corporate due diligence. The three points listed below are at the heart of the initiative:

Establishing adequate and effective risk management includes all the processes needed to identify and minimize human and environmental risks. In addition to submitting and publishing a policy statement, this includes the implementation of standardized audit processes, the formulation of guidelines and the determination of internal responsibilities.

The goal of the risk analysis is that companies become aware of potential human rights and environmental risks that exist in their own operations and in the supply chain. To do this, the first step is to establish transparency along the entire supply chain. The large number of sub-suppliers (Tier-n) and increasingly complex supply chains present companies with particular challenges. With the help of our partners and tool-supported solutions, we create transparency step by step along the entire supply chain. This enables you and your company to identify and eliminate risks in your supply chain structure early and automatically. By analyzing business areas, locations, products, raw materials, and countries of origin, possible existing risks such as child labor, forced labor, or the production and use of harmful chemicals can be identified.
Once such relevant risks have been identified within your own business activities or with your suppliers, these risks must then be assessed and prioritized. Risks are classified clearly according to the criteria specified by the law:

1. Severity of violation
2. Probability of violation
3. Reversibility
4. Ability to influence
5. Type of causal contribution

In addition to the risk analysis, it is necessary that you as a company set up an appeal mechanism, which guarantees an impartial and independent processing of the information as well as confidentiality. This also includes the provision of easy access to the reporting system for internal and external information, as well as the provision of information about the existence and accessibility of this reporting system.

If your company has identified human rights or environmental risks through the risk analysis or appeal process, appropriate preventive measures should be taken immediately. These can range from process adjustments and training of affected employees to the consideration of human rights and environmental impacts in the context of purchasing and procurement processes, as well as risk-based controls.

If violations have already occurred, they must be stopped immediately in your own business unit. If there are any violations at your suppliers, corrective measures will be defined and tracked immediately. Such corrective measures may include a specific schedule or industry initiatives. The last action to be taken is to pause or terminate the business relationship.

Companies need to take responsibility for their entire supply chain, not just for regulatory reasons. Increasing demands from consumers and global networks mean that transparency is a necessity for the resilience of your supply chain and your company’s reputation.

For years, valantic has been helping its customers with the further development of their suppliers. The combination of this long-standing experience and our expertise in the field of sustainability gives our customers an optimal basis for complying with the requirements of the LkSG in their supply chain. In addition, together with the supplier, we establish a proactive risk management system that recognizes potential problems at an early stage. As part of audits, we review and evaluate your suppliers against the established criteria and jointly develop appropriate measures for compliance with the guidelines.

Are you curious? Please contact us. We will work with you to develop the right concept and get you and your company ready to comply with the LkSG.