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Supply Chain Act seeks to combat social injustices in the global economy
Executive Education / 23 February 2021
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Marketing & Sales Koordinatorin
Michelle Neumann is Marketing & Sales Coordinator Professional & Executive Education at Frankfurt School.

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It’s official – the German federal government is aiming to make large German companies more responsible for their suppliers’ behaviour. In practical terms, this means that in the future, companies may be held liable for abuses in their supply chains – all the way from raw material extraction through to end-product.

Petition raises awareness

As it happens, neither the German government nor Parliament provided the initial impetus for the Supply Chain Act. The initiative was driven by trade unionists, especially German trade union ver.di, which in turn works with the Garment Workers’ Trade Union Centre (GWTUC) in Bangladesh. Incidents like the Rana Plaza disaster in 2013, which claimed 1,133 lives, are emblematic of the exploitation of women in Asia’s textile industries, miners in the Congo, and many others. Environmental organisations are also campaigning on the issue, because in addition to combatting brutal working conditions for humans, the Supply Chain Act also aims to tackle environmental abuses. In a petition, supporters of legal change urged Federal Chancellor Angela Merkel to recognise the importance of a Supply Chain Act – and since then, considerable progress has been made.

Provisions of the new Supply Chain Act

A policy paper accompanying the Act summarises the due-diligence obligation that German companies will have towards their supply chains. Initially, this obligation will be limited to the company itself and its direct tier-one supplier. Obligations to suppliers further upstream only arise if the German company becomes aware that something is amiss. If this happens, companies are required to follow up the information, because they are deemed to be indirectly responsible. Generally speaking, companies will be expected to regularly review supply-chain criteria such as working conditions or health and safety, and to rule out any environmental hazards posing a danger to human life. The benchmark for these reviews will be the fundamental human rights set out in the International Labour Organisation’s international labour standards.

Once the Act comes into force, companies must perform this risk analysis every year. The Supply Chain Act also requires companies to draw up a policy statement and take preventive measures. If a company should identify a human rights violation, it must immediately initiate corrective measures, differentiated according to whether the supplier involved is direct or indirect. In the event of such violations, companies may be subject to punitive fines of up to ten percent of turnover, and possibly even excluded from public tendering for periods of up to three years. These penalties are intended to ensure that unscrupulous business practices no longer pay. Monopolies and major corporations will also be obliged to require their overseas suppliers to provide decent working conditions and comply with international environmental standards. Germany’s Federal Office of Economic Affairs and Export Control will be responsible for monitoring due-diligence obligations.

Reports from Berlin suggest that the Act will come into force in early 2023. Initially, it will apply to all companies employing 3,000 or more people in Germany; after 12 months, this threshold will be lowered to 1,000 employees. This will give most companies a three-year window to prepare for the new regulations.

The preliminary draft of the Act has been drawn up – and its scope is currently broader than the key points set out in the policy document published by the Federal Ministries of Labour, Economic Affairs, and Economic Cooperation and Development. However, German television news service Tagesschau reports that dissenting voices in the Ministry of Economic Affairs currently describe the draft as too stringent, so it may take a little longer for the Act to pass into law. Even so, one thing is clear: the Supply Chain Act is coming!

Those who wish to optimise their supply chains and give themselves a clear competitive edge by streamlining their processes should take a closer look at our online course on Supply Chain Management (with certificate).

 

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