Overview of the Supply Chain Act

Fabian Filipczyk

Industry Insights

Around 25 million people in the world practice forced labor. At the same time, less than 20% of German companies with more than 500 employees comply with their voluntary commitment to corporate due diligence, as the German government's monitoring of the "National Action Plan on Business and Human Rights" (NAP) showed. For this reason, the Bundesrat passed the so-called "Supply Chain Due Diligence Act" at the end of June 2021. The aim of this new legislative initiative is to improve the protection of human rights along global supply chains. Accordingly, German companies are to be obliged to assume greater responsibility for compliance with human rights standards, such as the prohibition of forced and child labor, along their entire value chains in the future. The German law also serves as a template for a draft law on Europe-wide supply chain regulation, which the EU Commission plans to present soon. 

5 HT provides you with an overview of the companies affected by the new supply chain law, what the current status in the chemical industry is, what measures need to be taken in which time frame, and what the consequences for any violations are.

To whom and from when does the German Supply Chain Act apply?

  • As of 01.01.2023, the Supply Chain Act applies to all companies with a head office, principal place of business, administrative headquarters, registered office or branch office in Germany that employ at least 3,000 employees in Germany across the group.
  • From 01.01.2024, this threshold will be lowered and then affect all German companies with >1,000 employees.
  • The law applies both to the company's own business and to direct and in some cases also indirect suppliers.

What specific measures does the law require?

The law requires the implementation of comprehensive measures for risk analysis, prevention and remediation of any violations, both in the company's own business area and in relation to direct and indirect suppliers along its value chain. These include:

  • Establishing a management system regarding human rights and environmental risks.
  • Clarify internal responsibilities, e.g., by appointing a human rights officer.
  • Adopt a policy statement on respect for human rights
  • Annual identification and assessment of human rights and environmental risks
  • Implement preventive measures within own business units and towards direct suppliers to avoid human rights violations
  • Take corrective action in the event of identified legal violations (also with indirect suppliers if necessary)
  • Establishment of a whistleblower or complaints system
  • Annual written reporting to the public

What is the current situation in the chemical industry?

Considering this extensive catalog of measures, the question arises as to how much has already been done in the chemical industry in the months since the law was passed and how large the proportion of companies is that have already implemented the required measures on a voluntary basis. The CHEMonitor Trendbarometer, for which more than 200 decision makers in the chemical industry were surveyed by the consulting firm Camelot Management Consultants on behalf of the trade journal CHEManager in the period from September to October 2021, revealed the following key findings:

  • 92% of the companies surveyed with >1,000 employees said they had already included a code of conduct in supplier contracts. For companies with up to 1,000 employees, the figure was only 62%.
  • 82% (>1,000 EE) and 54% (<1,000 EE) have implemented a management system for human rights and environmental risks.
  • Only 29% (>1,000 EE) or 10% (>1,000 EE) have appointed a human rights officer and only 65% (>1,000 EE) or 21% (<1,000 EE) have implemented a whistleblower system.

This leads to the following conclusion: 
-> Although small and medium-sized companies have an extra year, they also currently have a much greater need to make adjustments to implement the new law.
-> Large companies and businesses that are members of corresponding initiatives in the chemical industry, such as "Chemistry to the power of 3" or "Together for Sustainability", consider themselves well prepared for the implementation of corresponding measures. Those that have already voluntarily implemented corresponding measures are therefore currently at an advantage compared to their competitors.

What challenges do companies expect to face during implementation?

In the CHEMonitor survey, representatives from the chemical sector were also asked about the biggest expected challenges in connection with the Supply Chain Act:

  • In the CHEmonitor, 83% of the chemical companies surveyed said they saw the high level of bureaucracy as a potential challenge.
  • 58% cited legal uncertainties regarding liability, 55% a lack of alternatives for key suppliers and 55% a lack of willingness on the part of suppliers to undergo audits as possible challenges to implementation.
  • What are the consequences for companies in the event of violations?
    The Federal Office of Economics and Export Control is responsible for monitoring implementation. In the event of violations, the law provides for the following measures:
  • Fines of up to two percent of the worldwide, annual concert turnover.
    -> 100,000€ - 800,000€ Even more in the case of sales of >400 million €.
  • In the case of fines >€175,000, companies can also be excluded from public contracts for a maximum of 3 years.

Where can companies get help with implementation?

The German government has set up a helpdesk for questions and advice on the new Supply Chain Act, more info at

Phone: +49 (0) 30 590 099 430
E-mail: HelpdeskWiMR@wirtschaft-entwicklung.de
Website: wirtschaft-entwicklung.de/economy-human-rights

But it is also worth taking a look into the world of startups, where there are already a large number of companies offering holistic solutions that help with the future implementation of the required measures of the Supply Chain Act. For example, startups assist with monitoring and risk analysis along the entire supply chain, implementing and tracking preventive measures, and collecting data for documentation and reporting purposes to key stakeholders.

5-HT has several network startups working on supply chain law. Feel free to contact us if you would like to learn more about our support services:

stefan.kohl@5-ht.com
frank.funke@5-ht.com

Sources:
- https://www.bmz.de/de/entwicklungspolitik/lieferkettengesetz#anc=id_59604_59604 
- https://www.chemie.de/news/1173494/lieferkettengesetz-chemie-erwartet-hohen-buerokratieaufwand.html
- https://www.chemanager-online.com/news/lieferkettengesetz-bringt-neue-regeln-fuer-unternehmen?elq_mid=55593&elq_cid=29670573&utm_campaign=35480&utm_source=eloquaEmail&utm_medium=email&utm_content=EMAIL%20GIT%20CHEManager%20newsletter%20DE%201ST%20210923%20GSALL%20-%20CHEMonitor-Umfrage
- https://www.sueddeutsche.de/wirtschaft/lieferkettengesetz-lieferkette-1.5222519
- CHEmonitor Nr. 37: https://www.chemanager-online.com/news/chemonitor-2-2021-verantwortung-der-lieferkette
- https://sustainabill.de/lieferkettengesetz/?lang=de 

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