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The German Supply Chain Act, known by its rather lengthy official title, Lieferkettensorgfaltspflichtengesetz (LkSG), represents a major step forward in enforcing corporate responsibility. This regulation requires companies to intensify their commitment to human rights and environmental standards. This article explores the key aspects of LkSG, highlighting its applicability, the specific risk factors it targets, and the stringent penalties for non-compliance. We will also detail the obligations and proactive measures that companies and suppliers must undertake.
👉 What is the LkSG? What companies will be impacted by the legislation? And what can companies do to prepare?
The Lieferkettensorgfaltspflichtengesetz, more commonly referred to as LkSG or the German Supply Chain Act (GSCA), is a significant regulatory framework implemented in Germany, designed to enforce corporate accountability for human rights and environmental protection.
Enacted in January 2023, this law obligates companies headquartered in Germany, as well as foreign corporations with a registered branch, employing 1,000 or more staff, to transparently disclose their due diligence processes. These processes must focus on identifying, preventing, and mitigating any potential human rights abuses and environmental damages in their operations and supply chains.
💡 LkSG not only affects these large companies but also extends its influence to a vast network of their suppliers, both within and beyond Germany. This creates a ripple effect of responsibility and vigilance across global supply chains.
Under this law, companies are obligated to conduct comprehensive risk assessments regarding human rights and environmental issues. These assessments must be carried out regularly (at least once a year) and include both direct and, in certain circumstances, indirect suppliers (ie. when there is credible evidence of human rights or environmental abuses, companies must also perform targeted risk analyses on their indirect suppliers).
Non-compliance can lead to severe penalties, potentially amounting to as much as two percent of a company's annual global turnover. To assist companies in meeting these obligations, the German Federal Office for Economic Affairs and Export Control (BAFA) offers comprehensive guidance, facilitating an effective alignment with the requirements of the LkSG.
The LkSG, effective from January 1st, 2023, applies to companies that have more than 1,000 employees and are either based in Germany or are German-registered branches of foreign companies. This expansion of scope from the initial threshold of 3,000 employees, effective from January 1st, 2024, significantly broadens the range of businesses affected by the legislation. With this change, it's anticipated that around 2,800 companies will now be encompassed by the LkSG.
The LkSG's applicability extends to companies with their central administration, principal place of business, administrative headquarters, or statutory seat in Germany. It also includes employees working abroad in the employee count. Furthermore, the LkSG is relevant to any company with a branch office in Germany employing more than 1,000 workers within the country.
❗️Even if your company doesn't meet the specified thresholds, smaller businesses, including small and medium-sized enterprises (SMEs), will likely feel the impact. This is because the larger companies targeted by the law will probably extend their legal obligations for due diligence to their suppliers. Going forward, these smaller companies may fall under the influence of the German Supply Chain Act, even though they are not directly subject to its requirements.
The German Supply Chain Act requires companies to oversee and address any violations within their own business processes and those of their direct global suppliers, from raw material extraction to product delivery to the final customer.
Moreover, if there is credible information about potential human rights or environmental breaches by an indirect supplier, the company is obligated to carry out a risk assessment for these specific violations.
The Lieferkettensorgfaltspflichtengesetz (LkSG) centres on managing risks and safeguarding human rights within corporate supply chains. The law ensures that companies operating in Germany meet the standards set out in the United Nations (UN) Guiding Principles on Business and Human Rights and the Organisation for Economic Co-operation and Development (OECD) Guidelines for Multinational Enterprises. It helps companies in detecting, averting, and rectifying violations related to human rights and the environment.
The law highlights a range of human rights concerns, including child and forced labor, modern slavery, wage and gender discrimination, ethnic discrimination, and illegal evictions.
In terms of environmental protection, the LkSG addresses risks associated with the manufacturing and use of mercury products, aligning with the Minamata Convention. It also covers the production and utilisation of prohibited chemicals as per the Stockholm Convention and regulates the import and export of hazardous wastes in line with the Basel Convention. Additionally, the legislation is concerned with the contamination of natural resources, including soil, water, and air, and focuses on issues like excessive water use and other notable environmental pollution.
The German Supply Chain Act is overseen by the Federal Office for Economic Affairs and Export Control (BAFA). The BAFA is responsible for reviewing annual due diligence reports submitted by companies. There are stringent penalties for non-compliance. These sanctions are designed to ensure that companies adhere to their due diligence obligations:
👉 These penalties underscore the seriousness with which the German government approaches corporate responsibility in human rights and environmental protection, emphasising the importance of adherence to the Act's provisions.
Under the German Supply Chain Act, companies are required to undertake a series of steps for human rights and environmental due diligence. These steps are designed to ensure compliance with the Act's regulations:
These obligations ensure that companies are actively involved in preventing human rights abuses and environmental damage, extending their responsibility throughout their supply chains.
What should companies do now to ensure that they’re compliant with LkSG?
By adhering to these guidelines, companies and their suppliers can effectively align with the LkSG's requirements, thereby promoting ethical and sustainable business practices.
👉 To learn more about the CSRD and ESRS head over to our blog.
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