The German Supply Chain Due Diligence Act will apply from January. Companies then have to check whether suppliers comply with human and labor rights. Companies see this as unreasonable bureaucracy, human rights activists and the EU do not even go far enough.
For Reinhold von Eben-Worlée, there is no such thing as the end of the world. “German medium-sized companies will perish,” says the President of the Association of Family Entrepreneurs to the “world”. The source of his gloomy prognosis is the Supply Chain Due Diligence Act, LkSG for short, which will apply from January. This obliges companies to check their suppliers in the future to ensure that they also comply with human and labor rights, i.e. do not employ children or forced labourers, guarantee basic occupational safety, pay decent wages and do not discriminate against anyone.
In Germany, the law initially applies to all companies with at least 3,000 employees worldwide. That is around 900. From 2024 it will also apply to all companies with at least 1000 employees, which will increase the group to around 4800 companies. They are initially obliged to set up risk management, i.e. to create a body that checks their own supply chains. There must also be preventive measures and a complaints office.
The point that is not only criticized by Eben-Worleé is the obligation to document the supply chain. The Federal Office of Economics and Export Control (BAFA), which controls the law, sent a questionnaire to the companies concerned. 437 different questions have to be answered there. Von Eben-Worleé calls it a “bureaucracy flood”. He fears that it will favor large companies that can more easily assign employees to do this documentation.
The German supply chain law is still harmless. Companies are only obliged to check their direct suppliers as best they can. If suppliers of suppliers behave incorrectly or if suppliers deceive their German business partners about the conditions in their plants, German companies are only liable if they can be shown that they have failed in their duty of care. “The law falls short,” says Markus N. Beeko, Secretary General of Amnesty International in Germany.
Basically, critics like von Eben-Worleé and the human rights activist even agree. The German supply chain law is not sufficient to effectively enforce human rights along the supply chain. “This kind of thing doesn’t help anyone,” says the family business owner. Only the consequences that entrepreneurs and human rights activists want to draw from this are completely different. Von Eben-Worleé wants politicians to take care of human rights around the world and not outsource the work to companies. Beeko, on the other hand, thinks that companies need to be put on a much tighter leash.
The latter will also happen: in 2025 the European supply chain protection law will take effect. This goes far beyond German law. Firstly, it already applies to companies with 500 or more employees and a turnover of more than 150 million euros. In Germany, there should be around 9,400 companies. Companies in sectors that are particularly prone to misconduct, for example in the textile industry or mining, must comply with this from 250 employees and 40 million euros in sales.
Unlike German law, these companies must control their entire supply chains, not just the direct suppliers. In addition, they must enable a complaints procedure for employees of suppliers. They must also present a plan on how they will implement the requirements of the 2015 Paris Climate Change Agreement. The point that pleases human rights activists the most and causes companies the greatest concern: Affected employees of suppliers can sue European companies in the event of misconduct in EU courts. A German company might then have to deal with complaints from Indonesian child or Chinese forced laborers who are employed by a supplier somewhere along the supply chain. If the worst comes to the worst, this will not only be expensive, but also a PR disaster.
“This can also mean an opportunity for medium-sized companies,” says Marco Schulten. He is not entirely impartial, as he is Managing Director at Proactis, a Bonn-based company that offers companies software solutions for monitoring their supply chains. However, his arguments are also shared by accountants and analysts. Tenor: Companies that carefully implement the requirements of the supply chain laws at an early stage will have an advantage in the market. “Companies that can credibly demonstrate that they have clean supply chains and good compliance become more attractive for both customers and investors,” says lawyer Daniel Wuhrmann in an interview with “Markt und Mittelstand”.
In addition, proponents argue, companies would have had enough time – and in the case of EU law, still enough time – to prepare for the tougher laws. “The demand for sustainability and the protection of human rights in supply chains is nothing new,” says Wuhrmann. Nevertheless, some companies feel overwhelmed: “We have 8,000 suppliers and offer 480,000 products. That can’t be done,” says Carl Martin Welcker, head of the Cologne mechanical engineering company Schütte and ex-president of the mechanical engineering association VDMA. However, there will be no political return – but neither will the German middle class.
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