Sustainability Blog

New Guidance for German Supply Chain Act

By Apurva Gosalia - Oct 18, 2022

In August, Germany’s Federal Office for Economic Affairs and Export Control (BAFA) issued guidance on the Supply Chain Due Diligence Act (LkSG). The LkSG requires German companies to carry out human rights and environment-related due diligence on themselves and their suppliers. When it comes into force on Jan. 1, 2023, the act will apply to enterprises with at least 3,000 employees. As of Jan. 1, 2024, this will drop to 1,000 and starting from then some companies in the broader lubricants space will also join the game.

Under the act, companies must ensure that it identifies, prevents, stops or at least mitigates risk. This applies to both their own business and their suppliers. As for money laundering or anti-corruption, companies must establish a risk management system that forms the organizational and procedural framework for fulfilling other due diligence obligations. BAFA will monitor and enforce due diligence obligations and may impose penalties and fines for breaching obligations. BAFA will also assist companies by publishing handouts that provide information, assistance and recommendations on compliance with the LkSG.

With respect to risk analysis, authorities may impose a fine if it has not been carried out correctly, completely, on time or not at all. At the same time, enterprises should always bear in mind that the BAFA is not the legislator.

Free Sustainability Blog

Never miss an update with the Sustainability Blog Alert sent direct to your inbox.

Loading

The handouts are non-binding and are subject to judicial review, at least when they take on concrete form in an administrative order imposing a fine or other administrative act. The LkSG only makes abstract stipulations for the risk analysis. It does not provide any further details on how companies should carry out a risk analysis. Companies can exercise their own discretion in this respect.

As things stand, the Supply Chain Directive planned at the European Union level (officially known as the Directive on Corporate Sustainability Due Diligence) provides for almost no relief for companies with respect to indirect suppliers. If it came into force, there would be an express legal requirement to include indirect suppliers in all risk analyses. However, by the time companies have to comply with the requirements of the EU Directive, they likely have established or expanded risk management systems and gained experience with risk analysis in their supply chains.

On October 15, BAFA published a questionnaire on LkSG reporting, allowing companies to check their compliance. All companies that fall under the scope of the LkSG must regularly publish a compliance report with the statutory due diligence requirements. The answers to a structured questionnaire form the basis of a report, which when published fulfils a company’s reporting obligation.

“Plausible statements … on internal processes that have already been started, will be given appropriate consideration during the BAFA audit,” said BAFA President Torsten Safarik.

BAFA published the questionnaire in advance so that companies can examine the content of the subsequent questionnaire. This allows them to check if they already have the required information for a complete report or require more preparation.

A broad participation and stakeholder process preceded the conception of the questionnaire. The focus was on practical and procedurally efficient design within the framework of the legal requirements of the act.

The first BAFA handout has useful tips and information on the concept and methods of risk analysis, according to the LkSG. The companies concerned should read the handout carefully, but only implement its recommendations after critical evaluation. BAFA goes beyond the wording of the LkSG, because it takes the position that indirect suppliers should also be included in this risk analysis. This is especially with respect to the risk analysis on an ad hoc basis due to a change in business activity.

STAY SuSTAYnable!

Comments

Comments are closed.