Supply Chain Due Diligence Act

The German Supply Chain Due Diligence Act (LkSG) comes into force on January 1, 2023 and applies to companies with more than 3,000 employees. Then from January 1, 2024, it will apply to all companies with more than 1,000 employees. As the title suggests, the act concerns the observation of human rights and specific environmental due diligence obligations across a company’s supply chains. These due diligence obligations include:

1. Establishment of risk management procedures across all relevant business processes (§4)
2. Risk analyses to be conducted at least once a year to identify operational risks and risks relating to direct suppliers (§5)
3. Company management to adopt a policy statement on the company’s human rights strategy (pursuant. to §6 para. 2, p. 2)
4. Implementation of preventive measures (§6)
5. Preparation and publication of a report on the fulfillment of due diligence obligations (§10)
6. Corrective actions to be taken to prevent, stop or minimize legal violations (§7)
7. Incident-based risk analyses, preventive measures, and remedial measures for indirect suppliers (§9)
8. Establishment of a complaints procedure

The supply chain encompasses the steps and companies involved in the production and marketing of a product, i.e. from raw material extraction to delivery to the end customer. Services such as transport or intermediate storage are also included. This means that the law also indirectly affects companies that do not directly fulfill the aforementioned due diligence obligations but must provide information to their customers. Human rights that must be respected are:

• Prohibition of child labor
• Protection against slavery and forced labor
• Freedom from discrimination
• Protection against the unlawful seizure of land
• Occupational health and safety and related health hazards
• Ban on withdrawing the payment of a fair wage
• Right to form trade unions or employee representative bodies
• Ban on causing harmful changes to the soil or water pollution
• Protection from torture

The following environmental laws must be complied with:

• Specific substance bans
• The Minimata Convention on Mercury
• The Stockholm Convention on Persistent Organic Pollutants (POPs)
• The Basel Convention on Transboundary Movements of Hazardous Wastes and Their Disposal

It is important to know that the principle of reasonableness applies. First, the obligations to be fulfilled are graduated according to the company’s range of influence:  Different regulations apply to the company’s own business operations than to the actions of contractual partners such as subsidiaries or other suppliers. In addition, a company is only required to do what it can reasonably expected to do based on parameters such as size, the nature of its business, or its proximity to the supplier. There is no obligation to prevent something unfavorable from happening, only an obligation to make an effort to do so.

The Commission’s proposal for the European Supply Chain Due Diligence Act (Directive on corporate sustainability due diligence), adopted on February 23, 2022, provides for similar requirements to those stipulated in the German law. One major difference is the companies involved and the expanded scope which now includes climate protection. Affected companies:

• Two years after the law has been enacted: EU companies with more than 500 employees and global net sales of more than 150 million euros, plus companies from third countries that generate the same turnover
• Four years after the law has been enacted: EU companies in certain sectors with more than 250 employees and annual net sales of 40 million euros, plus companies from non-EU countries that generate the same turnover

Additional rights and regulations to be considered:

• Fundamental and human rights concerns such as the right to believe and worship as you choose
• Children’s rights (also beyond child labor)
• Rights of indigenous peoples
• Biodiversity protection
• Washington Convention on International Trade in Endangered Species (CITES)
• Trade in hazardous chemicals (PIC)
• Protection of the ozone layer
• Compliance with the targets set out in the Paris Agreement on climate change (European Green Deal)

A further variance from the German LkSG is that rules on liability are also expressly provided for if due diligence duties obligations are not observed. It is currently not possible to predict when the European regulation will come into force. When the time comes, we will inform you here, in our e-magazine the ipJournal, and in our newsletter.

The introduction of the LkSG once again also highlights the relevance of conflict minerals for European companies. So far, only importers in the EU have to comply with relevant due diligence requirements when they import tin, tantalum, tungsten, their ores and gold (known as the 3TG). Other companies were only affected indirectly when they supply goods to publicly listed companies in the US, which are required by the Dodd-Frank Act to provide information about the origin of these minerals. Among other things, the aim of the LkSG is to prevent child labor and safeguard occupational health and safety, and a fair wage. This is often not the case in many mines where minerals such as the 3TG and mica and cobalt are extracted – and this continues to be the case all over the world (not only in the Democratic Republic of the Congo, which 3TG regulations have applied to so far). An Excel form called the CMRT is now available which can be used to report the 3TGs defined as conflict minerals. This has been provided by the Responsible Minerals Initiative (RMI). An enhanced reporting form – the EMRT – was also made available in October 2021. This form aims to identify bottlenecks and gather information on due diligence in the cobalt and mica supply chain.