The Supply Chain Duty of Care Act (LkSG) is a law that came into force on January 1, 2023. The LkSG requires companies to take responsibility for their supply chains and ensure compliance with human rights and environmental standards throughout their supply chains. To this end, we discuss the key provisions of the LkSG, their impact on companies and how a solution to this challenge may look.
Key provisions
Obligation to conduct due diligence
The LkSG requires companies with more than 3,000 employees in Germany to establish due diligence processes for their supply chains. The due diligence process must include a risk analysis to identify potential human rights and environmental risks in the supply chain, as well as measures to avoid and mitigate such risks. The due diligence process must be documented and companies must publish an annual due diligence report.
Obligation to prepare an accountability report
One obligation that applies to the authority is the preparation of an annual monitoring and enforcement report. It contains the violations identified as well as corrective actions ordered during the previous year. This was first prepared in 2022 and is available on the Authority’s website.
Joint and multiple liability
The LkSG introduces joint and several liability for companies in the supply chain. This means that companies are responsible for human rights and environmental violations in their supply chain, even if they did not directly cause them. Companies can be held liable for the actions of their suppliers and subcontractors.
Fines and exclusion from public procurement
Companies that do not comply with the LkSG can be fined up to 2% of their annual turnover. In addition, companies that repeatedly violate the LkSG can be excluded from public procurement for up to three years.
Challenge for companies
The LkSG has a significant impact on companies operating in Germany. Companies must implement due diligence for their supply chains and ensure that human rights and environmental standards are respected in their supply chains. Due diligence requires companies to identify and address potential human rights and environmental risks in their supply chains, which can be a complex and challenging task. In this context, a GRC platform can help record supply chain-related processes to identify vulnerabilities and provide documented evidence of compliance with legal requirements. Complemented by the documentation, publication and monitoring of labor and conduct policies, this can provide additional standards and safeguards for compliance with due diligence processes.
In addition, companies must also be aware of the joint and several liability introduced by the LkSG. Companies should take steps to ensure that their suppliers and subcontractors comply with human rights and environmental standards. This can be done by auditing suppliers, passing on the legal requirements from the LkSG, verifying them and having suppliers confirm them. So-called third-party risk management is an essential component of a GRC platform and thus ensures in particular the defense against entrepreneurial consequences that are not self-inflicted.
The fines and exclusion from public procurement introduced by the LkSG mean that companies must take the law seriously. Failure to comply with the LkSG can have a serious impact on a company’s finances and reputation. Companies must ensure that they comply with the LkSG and take steps to prevent and minimize potential human rights and environmental risks in their supply chains. Such risk minimisation is ideally achieved through an ISO standard risk management process. In conjunction with the measures taken and regular checks, a minimum residual risk can thus be achieved, which is clearly prepared thanks to a GRC platform and is available to both the company and external institutions as evidence.
Conclusion
The LkSG is a significant development in the field of supply chain responsibility. The law requires companies to take responsibility for their supply chains and ensure that human rights and environmental standards are respected throughout their supply chain. For companies operating in Germany, this results in significant obligations and potential liabilities.
Companies must establish due diligence procedures for their supply chains, be aware of the joint and several liability enshrined in the law, and take steps to ensure compliance.
A specialised software solution can help companies deal with the impact of the LkSG by enabling them to establish and document their due diligence processes, identify potential risks in their supply chains, and monitor and manage their supply chains more effectively. Companies that take the LkSG seriously and implement effective due diligence processes accordingly not only comply with the law, but also demonstrate their commitment to responsible supply chain practices, which can have a particularly positive impact on the external perception of the company brand.