The implementation of the Supply Chain Due Diligence Act (LkSG) in Germany means that corporate due diligence obligations for respecting human rights and protecting environmental concerns are now regulated by law. The law itself sets out which preventative and remedial measures businesses must adhere to along their supply chains, and requires the establishment of a complaints procedure and regular reporting.
At the start of last year, the new obligations initially only applied to companies based in Germany with at least 3,000 employees. However, they now also apply to companies from with 1,000 employees and above.
Companies that violate the law face fines of up to €8m or up to 2% of their global annual turnover. Furthermore, in the event of serious violations, companies can be excluded from public procurement for up to 3 years.
The law caused mixed feelings from the start. While environmental associations and human rights organisations called for stricter regulations, companies argued about the associated costs.
How big an impact is the supply chain law having on balance sheets then? A recent IntegrityNext/BME study shows business have received the changes with lukewarm positivity. Companies point out that the time and organisational effort, transparency and data quality required for LkSG compliance represent significant challenges.
Two-thirds of the companies surveyed see their supply chain as a decisive lever for greater sustainability. For companies with more than 3,000 employees, this number is as high as 82%.
The law has also contributed to increased data collection in the supply chain and sustainability reporting by companies. While in 2021 only 25% of those surveyed said they would publish a sustainability report, the number is now 46%, according to the study. When it comes to companies with more than 3,000 employees, 80% publish a sustainability report.
Moreover, more than three-quarters (78%) of all respondents check their suppliers closely for sustainability aspects or plan to do so. Among the groups that are already affected by the LkSG, the number is as high as 87% (over 3,000 employees) or 83% for companies with over 1,000 employees. SMEs (fewer than 1,000 employees) are even further behind at 66%. 50% also assess direct suppliers (29%: 2022), and 44% assess high-risk suppliers (32%: 2022).
Respondents reported relatively few problems with setting up a risk management system and conducting regular risk analyses. 38% of all companies surveyed were also convinced that the LkSG significantly helped them to advance sustainability in the company and their supply chain in practice.
“The vast majority of companies are aware of their responsibility and are already paying attention to compliance with human rights and environmental protection in their supply chains. It is also positive that the purchasing departments gain more responsibility with the LkSG,” says BME Federal Board Chairperson Gundula Ullah.
Overview of the Entire Supply Chain Remains a Challenge
However, taking remedial measures to minimise the risk of due diligence obligations with indirect suppliers was a challenge for many companies. 30% of those surveyed said they had good to very good experiences with this, and only 14% reported good to very good experiences with implementation.
80% of those surveyed state that they are planning or have already implemented a risk management system for ESG issues. 84% of companies use software solutions, for example, to carry out data risk analyses or create reports. 88% of software users rely on third-party providers.
Overall, more than three-quarters of those surveyed (76%) have at least partial transparency about their direct suppliers but have problems analyzing the risks at the lowest supply chain levels. For companies with 3,000 or more employees, the quality of the required data also represents a major challenge (50%). In addition, companies see time and organisational effort as the biggest hurdles in complying with due diligence obligations. Of the companies that are about to implement the LkSG, only 22% of them feel well or very well prepared to carry out regular risk analyses of their direct suppliers. Only a quarter see themselves as good to very well prepared.
“The figures show that we have already achieved a lot in implementing the LkSG. But companies still need help to be able to exploit the full potential of their supply chain sustainably and safely,” emphasised BME Managing Director Dr. Helena Melnikov.
The experiences of German companies with the implementation of the LkSG will prove to be a valuable advantage as soon as the European regulations come into force.
So Far, No Sanctions Have Been Imposed
BAFA (Federal Office for Economic Affairs and Export Control) has also taken stock. In 2023, 486 inspections were carried out at companies. The majority of the controls covered companies from the following sectors: automotive, chemicals, pharmaceuticals, mechanical engineering, energy, furniture, textiles, and the food and beverage industry.
BAFA received 38 complaints through its complaints procedure, 20 of which had no reference to the due diligence obligations enshrined in the LkSG or were not sufficiently substantiated.
No sanctions have been imposed so far.
Photo: Rewe Group, CC BY-SA 4.0, via Wikimedia Commons