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German Supply Chain Act Compliance

The German Supply Chain Act (“Lieferkettengesetz” or “Sorgfaltspflichtengesetz” or LkSG) is effective as of January 1, 2023. This law requires companies that have operations in Germany to assess, mitigate, prevent, and address human rights and environmental risks through all tiers of the value chain.

Addressing German Supply Chain Act compliance challenges

This law applies to organizations based in Germany with 3,000 or more employees. In 2024, this will extend to organisations with 1,000 or more employees. It is anticipated that an EU Directive with similar principles will also likely be adopted in the future.

This regulation was created because of increased risk to human rights abuse due to extended supply chains, complex international procurement, and a lack of visibility and transparency around business conduct and ownership.

Organizations often incorporate internal controls and training to mitigate compliance risks apparent within the business. However, these controls and activities are rarely extended to the third-party entities and the vendors they deal with. An enforcement agency (BAFA) is already in place to manage investigations into breaches of the Act, and if companies fail to comply, they may face civil liability for damages and risk sanctions.

Incorporating processes to onboard, screen and continuously monitor third parties, to identify and prevent human rights abuse, and undertake ongoing environmental due diligence, creates a more sustainable and ethical supply chain for businesses, and helps organizations to comply with the Act.

What is impacted by the German Supply Chain Act

Code of Conduct & Compliance Policies

Relevant organizations should ensure their company policies include a supplier code of conduct, employee and human rights, and the company’s approach to due diligence within the supply chain including the handling of complaints procedures and grievances.

Risk Assessment

Organizations must engage in a comprehensive risk assessment to understand whether their activities, and the activities of their direct and indirect suppliers, have a potential or negative impact on internationally recognized human rights.

Third-Party Due Diligence

Conduct ongoing third-party due diligence to identify and prioritize associated risks, and undertake the appropriate measures to prevent, minimize and eliminate human rights abuse, and any associated environmental violations, within the business and its third parties.

Confidential Reporting & Investigation

Companies should establish effective and confidential reporting tools and grievance processes, and make them accessible to all direct third parties, for employees to report any potential human rights violations occurring within the supply chain.

Transparent Reporting

Organizations must report on the measures they have taken to counter human rights violations on an annual basis. The reports should be publicly available on the company website.

Steps you can take to meet the German Supply Chain Act Requirements

Step 1

Establish comprehensive policies and procedures to define employee expectations and ensure the legal requirements of the German Supply Chain Act is understood, attested to, and incorporated within your supplier code of conduct, human rights processes, third-party due diligence and ongoing monitoring, and the handling of employee concerns and grievances within the supply chain.

Step 2

Conduct comprehensive assessments to evaluate each third party for potential human rights and environmental risks and screen each third party on an ongoing basis to uncover any future risks.

Step 3

Ensure your company uses secure, confidential employee reporting tools that are accessible both to internal employees, and to the employees of your direct third-parties, to report any concerns within the workplace and potential violations of the German Supply Chain Act.

Step 4

Publicly report the measures taken to counter human rights violations and ensure third-party conduct on an annual basis.