While the headline says the newly adopted Germany targeting human rights abuses in global supply chains is “revolutionary” what it is, it certainly shouldn’t be. But nonetheless, today, June 11, 2021, the German Parliament ushered in a long-awaited shift to mandatory business compliance rules. After months of negotiations, German lawmakers finally pushed him to cross the finish line in the dying days of the current legislature. The bill will see German multinational companies held legally responsible for any human rights or environmental violations found in their global supply chains.
“The German government has taken a critical step to ensure that companies operate responsibly,” said Juliane Kippenberg, associate director of the children’s rights division at Human Rights Watch. “Respecting human rights in global supply chains is not something that should be optional. “
This news comes at a time when global companies are already being pushed towards environmental, social and governance (ESG) compliance, with a massive effort to reduce Scope 1, 2 and 3 carbon emissions from their chain operations. sourcing and a concerted effort to avoid suppliers and manufacturers who do not meet the standards that leading companies in the industry are now expected to meet.
Who will the new law affect?
With the new German legislation, organizations that do not follow the rules and regulations could be forced to pay fines potentially equivalent to 2% of their overall annual turnover. However, it is not applicable to all.
According to Reuters, by law, companies above a certain size will be required to establish due diligence procedures that prevent abuse; From 2023, only companies with more than 3,000 employees in Germany will be affected. From 2024, the rules will extend to companies with more than 1,000 employees.
Statistics inside the country suggest that the first stage of this regulatory rollout will affect 900 companies, while the second stage will put 4,800 companies in the spotlight. The bill will also allow the government to temporarily exclude from public tenders companies that receive fines above € 175,000.
“Incalculable risks arise for companies,” said Joachim Lang, managing director of the Federation of German Industry. A word of warning from a respected leader, at a time when industry lobby groups and wholesalers fear the new law will increase bureaucracy and suggest price hikes may be in.
The capture of the German giants
After reviewing the new legislation, Daimler AG, known more commonly as auto giant Mercedes-Benz, a company which, if there were to be ESG compliance issues along its multinational supply chain, would pay hefty fees, welcomes the push of the change but hesitates on certain aspects of the bill.
“Daimler’s position is this: Respect for human rights is a central aspect of our sustainable business strategy. We therefore welcome the progress made on the supply chain law. Although the regulation is very ambitious, the proposed legislation has a sound overall approach. It is based on internationally recognized human rights and international agreements. And it gives companies more legal certainty in an area that has so far only been partially regulated.
Supply chains are not “chains”, but rather extremely complex networks: Daimler alone has more than 60,000 direct suppliers – and many more subcontractors. For this reason, we also consider the proposed gradual risk-based model to be reasonable. The responsibility of companies lies mainly with their own field of activity and their direct suppliers. Companies must then take action in the deeper supply chain if there are concrete indications of human rights violations. Daimler AG is already doing this today.
Although we support the proposed legislation in principle, we consider certain aspects to be critical, for example the planned fines of up to 2% of the average annual turnover. Instead of threats of sanctions, we believe that concrete measures, which companies must take in the event of a deficit, are more timely. In addition, some formulations are still vague and leave room for interpretation. Terms such as, for example, “fair standard of living” should be worded precisely in order to create legal certainty. In addition, documentation and reporting requirements should not lead to unnecessary bureaucracy and should be harmonized with existing rules. On the one hand, it doesn’t help people on the ground, and on the other hand, it places a burden on businesses – and implementation can pose significant challenges for small businesses in particular. “
This law is arguably one of the most significant developments in the supply chain space so far this year. But it should be remembered that changes do not and will not happen at the push of a button and that democratic principles should be applied to the discussion before enshrining legislation in the tablature. Defending the environment and human rights is a hike, not a brisk walk around the park, so for German companies it is time to get on the ground and start evaluating their chain operations. global and interconnected supply chain. And, hopefully, they’ll set a stellar example for the rest of us.