In future, large companies in Germany will have to carry out a careful risk analysis to determine whether violations of human rights or environmental standards have occurred in the past or are to be expected in the future. This is the core aspect of the Supply Chain Due Diligence Act (LkSG), which will come into effect on 1 January 2023. Companies failing to implement the law will face fines.

Which companies are affected by the supply chain act

From 1 January 2023, the act will initially apply only to large companies with more than 3,000 employees in Germany, whose administrative headquarters or statutory seat is in Germany. According to an explanatory memorandum on the act, this currently affects approximately 500 companies. From 2024, the threshold will drop to 1,000 employees which will affect will approximately 3000 companies.

The EU Commission’s proposals go further

On 23 February 2022, the European Commission adopted a proposal for a Directive on Corporate Sustainability Due Diligence. The proposal aims to foster sustainable and responsible corporate behaviour throughout global value chains.

1 January 2023 1 January 2024
Large companies with 3000+ employees, with admin headquarters or statutory seat in Germany
Applies to: main business areas and immediate suppliers
Large companies with 1000+ employees, with admin headquarters or statutory seat in Germany
Date unknown.
Implementation within two years of becoming law.
2 years later
Limited Liability companies with 500+ employees and more than EUR 150 million net turnover
Applies to: All business areas and entire value chain
Other limited liability companies with 250+ employees and more than EUR 40 million net turnover

The proposal will be presented to the European Parliament/Council for approval. Once adopted, Member States will have two years to incorporate the Directive into national law and communicate the relevant texts to the Commission.

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With our multidisciplinary teams, we can help you implement compliance rules and introduce risk management.

Yven Heine, Head of Sustainability, iAP Independent Consulting + Audit Professionals – an Ecovis company – Berlin, Germany

Differences between the two regulations

The EU Supply Chain Directive is aimed at harmonising regulation European-wide. Important differences include:

  • For now, the German LkSG is content with a policy statement, while the EU Directive sees corporate sustainability due diligence as an integral part of corporate policy and requires company management to take human rights, climate change and ecological consequences into account in all decisions.
  • Under the German LkSG, companies are only required to report through their own website, while under the EU Directive, companies will need to publicly communicate the due diligence obligations carried out.
  • The German LkSG is satisfied with risk management that has been put in place, while the EU Supply Chain Directive provides for the establishment of a comprehensive compliance management system. In addition, due diligence processes are to be set up and monitored.

What it means for companies

  • The Board must name a ‘Human Rights’ delegate and set out a strategy
  • More work for internal legal departments as international suppliers may be subject to different laws and regulations to follow
  • Supervision will be through agencies such as the Federal Office for Economic Affairs and Export Control

Things to look out for

  • The whistleblowing directive will also come into play
  • Be aware of the CPI (Corruption Perception Index)
  • The increased focus on supplier management (direct vs indirect suppliers) and HR departments

The work plan has 6 phases, including onboarding requirements for suppliers to due diligence and checks, reviews and controls.

Next steps

Affected companies should prepare as soon as possible. Instead of only complying with the minimum requirements of the German LkSG, we recommend that companies start implementing a long-term strategy which already takes into account the EU Directive.

For further information please contact:

Yven Heine, Head of Sustainability, iAP Independent Consulting + Audit Professionals – an Ecovis company – Berlin, Germany