What is the German Supply Chain Due Diligence Act?
A new rule requiring companies to use Due Diligence procedures in international supply chains to safeguard human rights and the environment went into effect on January 1, 2023. Companies in Germany with a workforce of 3,000 or higher are required to implement “suitable actions” for safeguarding human rights and environmental standards in their supply chains. The workforce will be down to 1,000 employees as of January 1, 2024. The objective is to prevent or reduce risks associated with human rights or the environment and end any violations of obligations related to human rights or the environment.
Understanding the requirements of the German Supply Chain Due Diligence Act (SCDDA)
According to the German SCDDA, businesses’ due diligence comprises three things:
(1.) proving that there are no human rights violations in their supply chains
(2.) continually detecting the potential risk of human rights violations
(3.) taking the necessary steps to reduce that risk. If violations occur, remedial action is needed.
EU companies must audit their suppliers along the global supply chain, including all direct and indirect commercial ties. Businesses should do risk analysis for value chain providers.
The primary goal of due diligence in the food business is to increase legal accountability for food handling. As a result, all actors in the food supply chain must demonstrate that they have exercised due diligence in obtaining their products sustainably to ensure the food’s safety.
What violations are covered by the law?
European businesses must ensure that their suppliers abide by laws protecting the environment and human rights. Here are some examples of violations:
- forced labour
- child labour
- inadequate workplace health and safety
- exploitation of workers
- breaches of the environment, such as the release of greenhouse gases, pollution, or the eradication of species or ecosystems
- Wage discrimination
What are the consequences if not compliant?
The act does not hold companies accountable for civil liability if they violate it. Nonetheless, companies may face monetary penalties depending on the gravity of the violation. For large companies with an annual global turnover exceeding 400 million euros (approximately US$475 million), penalties of up to 2% of their yearly global revenue may be applied. Additionally, companies fined at least 175,000 euros (around US$208,000) may face exclusion from public procurement for up to three years.
What steps need to be taken?
Companies subject to the law must put the following due diligence procedures into effect to safeguard human rights and the environment along their entire global supply chain:
a. Mapping of the supply chain for better transparency.
b. Establish a comprehensive risk management system to identify and address any environmental and human rights concerns within their supply chains.
c. Promptly implement remedial actions in cases where violations have occurred or when there is a high likelihood of such violations.
d. Develop due diligence procedures tailored to indirect suppliers, primarily when the company obtains credible information about violations.
d. Maintain detailed documentation of the company’s due diligence procedures, identified risks, and the actions taken. Publish an annual report on the company’s website, accessible to the public without charge, disclosing this information.
e. Adopt a policy statement outlining the company’s overall human rights strategy, including specific commitments and an approach to risk management.
How can traceability help businesses comply with the German SCDDA?
Traceability is a critical factor that enables us to identify human rights violations of supply chain due diligence and environmental degradation. Although many businesses are confident in documenting their thorough human rights due diligence in their supply chains, many need help establishing traceability regularly. This is especially true for supply networks in agriculture and fishing.
Traceability in supply chain management helps us to keep a check on the following factors.
- Conduct a supply chain assessment: Evaluating your supply chain to identify potential risks related to human rights violations and environmental impact. Assess your direct and indirect suppliers, subcontractors, and business partners to understand their practices and potential areas of concern.
- Enhance transparency and reporting: Establish mechanisms to document and report on your due diligence efforts. Prepare and publish a yearly report outlining your company’s due diligence procedures, identified risks, and measures taken to address them. Ensure the report is easily accessible to the public.
- The obligation of due diligence requires companies to prove that there are no human rights violations in their supply chains.
- As farmers do not get a fair share in the value chain as it is absorbed by the middlemen forcing them into adversities such as child labour and human trafficking. Traceability plays a vital role in showcasing fair wages given to workers, thereby preventing discrimination and exploitation.
- Continually evaluate your supply chain procedures to spot any flaws or potential opportunities for development. Keep track of legislative updates or alterations and modify your systems as necessary.
Advantages of using traceability to achieve compliance with the German SCDDA:
Companies can utilise traceability to detect the interdependencies within their supply chains that are likely to result in hazards for human rights, biodiversity, and greenhouse gas (GHG) emissions by gathering data from suppliers and subcontractors at various levels. Then, to eliminate the dangers that have been identified, solutions must be put into action.
CIED‘s invaluable insights and practical experience in collaborating with the agri-food sector, which operates diverse supply chains, are crucial to ensuring compliance with regulations. Our expertise lies in proficiently monitoring the intricate supply chain networks and managing the associated data. By leveraging CIED’s guidance, businesses can navigate the complexities of the German Supply Chain Due Diligence Act, enabling them to establish robust traceability mechanisms and streamline data management processes.
Corporate responsibility is growing, so players must evaluate and comprehend their value chains more thoroughly. Companies should consequently prioritise investing in supply chain traceability software since it enables them to comply with due diligence and ESG risk management regulations. Let us take a step forward to aggregate the sustainability metrics under a single roof using traceability.