The New Supply Chain Act

The new Supply Chain Due Diligence Act has been in effect since the beginning of the year. In the interest of human rights and the environment, the bureaucratic and financial burdens on companies are increasing.

Background

In a globalized world, compliance with environmental standards, human rights, and, consequently, labor rights is becoming increasingly important. Only clean supply chains guarantee “clean” products that end consumers can purchase with a clear conscience. To this end, lawmakers introduced the Supply Chain Due Diligence Act as early as the summer of 2021. The first phase of this law took effect on January 1, 2023.

Scope and Company Size

In the first phase of its implementation, companies with more than 3,000 employees are subject to the regulation. Since January 1, 2023, they have been legally required to review their supply chains for compliance with human rights. The workload involved is significant: risk assessments must be conducted, human rights officers appointed, and reports published on the respective companies’ websites. Failure to comply may result in fines. In the second phase of implementation, starting January 1, 2024, companies with 1,000 or more employees will also be subject to this reporting requirement. Some observers see this as a reduction in the competitiveness of the German economy, as the reporting and verification obligations are too extensive and difficult to fulfill. For example, suppliers are not exempt from the reporting obligations. However, for many larger companies, the number of suppliers runs into the four- to five-digit range.

Strengthening of the control mechanism through a new EU directive

An EU supply chain directive, scheduled for adoption in May 2023, aims to extend scrutiny beyond immediate suppliers and a company’s own business units to encompass the entire global value chain. Even companies with as few as 500 employees are expected to be affected by the new regulation—and thus large segments of the German SME sector. Efforts must now focus on how to alleviate the burden on these companies, especially in times of inflation and an energy crisis.

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