The Supply Chain Due Diligence Act (known as the Lieferkettensorgfaltspflichtengesetz or shortened to LkSG in German) came into effect in Germany in January 2023. Often referred to as the Supply Chain Act, it brings many new requirements for businesses. Currently in 2023, the law applies to businesses with 3,000 or more employees. Beginning in 2024, small and medium-sized businesses will also be affected by the legislation. Now, businesses have even more responsibility for human rights standards and environmental due diligence obligations along their supply chains. These obligations include analyzing risks and implementing a risk management system1 to identify and prevent risks along the supply chain for legal positions protected by the Supply Chain Act – such as forced labor or child labor.
According to a survey of internationally active businesses carried out by the German Chamber of Commerce and Industry2, half of all market players find it challenging to comply with this new policy. Those businesses are concerned about threats to their competitiveness, especially due to additional bureaucracy, increased costs and greater legal uncertainty.
Author
Jan Oppermann
Head of
Sustainability Practice
4flow
Lack of capacities despite great willingness to implement changes
The majority of businesses are aware of the new requirements. A survey conducted by the German Association for Materials Management, Purchasing and Logistics (Bundesverband Materialwirtschaft, Einkauf und Logistik e.V., or BME) reported that 87% of the participating small- and medium-sized businesses that are not yet affected by the German Supply Chain Act already want to comply completely or in part with the expected changes. The motivation for small and medium-sized businesses to implement such changes ahead of time varies. Some see the changes as a way to uphold their own corporate values or respond to increasing pressure from various stakeholders, while others want to prepare for the European law expected to take effect in 2026. However, their willingness is often limited by their lack of a structured approach and necessary internal resources: 51% of businesses surveyed by the BME reported they lack necessary processes and employees in their organizations. 55% reported a deficit when considering technical implementation.
Preparing for the new EU law – the most important steps
To prepare for the new European law, businesses should act now. This is the only way to ensure that the requirements can be fulfilled without delay once the law comes into effect. Often, businesses are missing the necessary transparency about their suppliers – even when it comes to tier-one suppliers3. Only 11% of the businesses surveyed have full transparency over sustainability risks associated with their direct suppliers. This leaves most businesses vulnerable, as they cannot detect potential risks.
Mapping the supply chain or performing a supplier sustainability audit are two productive ways of creating supply chain transparency. In this process, asking suppliers to do a self-assessment is one option for a first step . Structured documentation that also considers regional, geopolitical and industry-specific aspects helps businesses focus on and prioritize potentially risky suppliers. To get a clearer picture, including external data sources that are publicly accessible or privately shared might be necessary as a next step. This method gives businesses the necessary supply chain transparency to identify risks and prioritize countermeasures.
Digital tools can also help create transparency across the supply chain and identify potential risks. Additionally, businesses should identify available internal capacity and know-how early to determine where it makes sense to get external support from service providers.
With these strategies, businesses can tackle the challenges on the road to compliance with due diligence laws. Early implementation brings additional advantages for a business's reputation, their appeal as employers, and especially their supply chain resilience – as transparency over sustainability risks helps businesses detect and mitigate overall supply chain risks.
Supply chain legislation in Germany and Europe – what’s the difference?
The proposed European Corporate Sustainability Due Diligence Directive (CSDDD), expected to come into effect in 2026 at the latest, will go beyond the existing German law. The German Supply Chain Act establishes a gradation of requirements. The requirements depend on the level of influence the business has on the party responsible for violating the law and the number of production steps from the violation to the end product. The German law currently applies to businesses with at least 3000 employees located in Germany. Starting in 2024, its scope will expand to businesses with at least 1000 employees in Germany. The European legislation would affect businesses based or active in the European Union with as few as 250 employees and an annual revenue of over €40 million4.
In addition to expanding the scope to businesses within and outside Europe, the European legislation is expected to require businesses to take responsibility for supplier activities along the value chain. Unlike in the German Supply Chain Act, direct upstream suppliers as well as downstream activities and existing indirect business relationships such as tier-two suppliers must be considered. The European legislation will also go further than the German Supply Chain Act in terms of environmental responsibility – businesses must consider the reduction of natural resources, the ozone layer or biodiversity as well as the use, recycling and disposal of their products.
Compliance with the German Supply Chain Act is monitored by the German Federal Office for Economic Affairs and Export Control (Bundesamt für Wirtschaft und Ausfuhrkontrolle or BAFA) by way of corporate reporting and submitted complaints. Violations are punishable by fine or exclusion from consideration for public contracts. To monitor compliance with the CSDDD, the individual EU member states may designate a national ministry. These ministries will be empowered to set fines for violations of the law. The CSDDD also explicitly mentions civil liability for businesses. Though this mention is still subject to the principle of proportionality, it obligates businesses to take necessary action through due diligence.