The Ultimate Guide to Lieferkettengesetz

Legislation is rapidly being introduced by countries and trading blocs to improve human rights and help address the environmental issues facing the planet. Organisations across the world are slowly being scooped up by a metaphorical regulatory net which requires them to assess the potential for human rights and environmental risks within their supply chains and report on what they are proactively doing to address them.

Across the entire end-to-end process, from the finished product to the metals, minerals and other raw materials that are required to make them, companies must now demonstrate a clear understanding of the impact they are having on people and the planet.

In more and more of the world, ethical business and business as a force for good is now not only a way of differentiating or a way of meeting increasingly discerning consumer expectations, it’s a regulatory issue with financial penalties for doing it wrong.

In this latest Achilles Ultimate Guide, we take a detailed look at the Lieferkettengesetz Regulation, who it applies to, what it means to those organisations (and their suppliers) that need to comply and provide advice on how to get started based on our own experience of supporting organisations with supply chain risk assessment and compliance gained for more than 30 years.

You may also be interested in:

• Liefergettengesetz Infographic – Get a quick overview of the regulatory requirement
• What is enough? How far do you need to go to satisfy the regulators?
• 5 reasons why Achilles

What is Lieferkettengesetz? 

Lieferkettengesetz is a German word that translates to “Supply Chain Due Diligence Act” in English.

Lieferkettensgesetz is a law that was passed in Germany in June 2021. It requires companies to take responsibility for human rights and environmental violations in their supply chains.  

Under the Lieferkettengesetz legislation, companies are required to identify and address potential risks to human rights and the environment in their supply chains, including risks related to child labour, forced labour, and environmental pollution. Where risks haven’t been identified, companies must substantiate their claims by demonstrating robust due diligence was undertaken with the aim of identifying potential human rights or environmental violations. Where the company’s due diligence activities have identified risks must put in place measures to prevent or mitigate these risks, such as conducting regular audits and implementing corrective action plans. 

The law applies to companies in a wide range of industries, including energy, manufacturing, construction, clothing, and food and beverage. Failure to comply with the law can result in fines, legal action or being restricted from competing for public tenders. Lieferkettengesetz draws upon international guidelines such as the OECD Guidelines for Multinational Enterprises, human rights conventions defined by the International Labour Organisation (ILO) and three specific environmental conventions (Minamata Convention, Stockholm Convention and Basel Convention)  and is part of a growing trend towards greater corporate responsibility for human rights and the environment in global supply chains. Several other countries, including Norway, France and the Netherlands, have also implemented similar laws in recent years. 

Why is Lieferkettengesetz important? 

The Lieferkettengesetz is important for several reasons: 

• Protection of Human Rights: The law is designed to protect human rights by requiring companies to identify and address potential risks in their supply chains, including forced labour, child labour, and other forms of exploitation. By ensuring that companies are held accountable for human rights abuses in their supply chains, the law helps to protect vulnerable workers and communities around the world. 
• Environmental Protection: The law also helps to protect the environment by requiring companies to prevent and address environmental damage caused by their operations or their suppliers, including pollution, deforestation, and the destruction of habitats. This helps to promote sustainable business practices and reduce the environmental impact of global supply chains, particularly on local communities. 

• Responsible Business Conduct: The law promotes responsible business conduct by requiring companies to comply with ethical business practices in their supply chains, including respecting intellectual property rights, combating corruption and bribery, and ensuring fair competition. This helps to create a level playing field for companies and promotes sustainable economic development. 
• International Norms: The law is consistent with international norms on business and human rights, including the United Nations Guiding Principles on Business and Human Rights. By aligning with these norms, the law helps to promote a common understanding of the responsibilities of companies in relation to human rights and the environment. 

Overall, the Lieferkettengesetz is important because it helps to promote sustainable and responsible business practices, protect human rights and the environment, and create a more just and equitable global economy. 

Which organisations need to comply with the Lieferkettengesetz? 

The new legislation has been developed as part of a phased implementation as follows: 

• From January 2023 the Act has applied to all companies employing 3,000 or more staff that have their head office, principal place of business, or registered office in Germany. This also includes foreign companies with a branch office in Germany with 3,000 or more staff.  
• As of 1 January 2024, the Act will be extended in its scope to cover companies with head offices or branches in Germany with 1,000 or more employees. 

The law also applies to companies that import goods into Germany, regardless of where the company is based if the imported goods are intended for sale or use in Germany. This means that companies that are based outside of Germany but export to Germany may also be affected by the law. 

The German government has said that it expects approximately 2,900 companies to be subject to the act. 

What does the act encompass? 

Risk areas covered by the Act are based on International Standards and guidance documents such as the ILO Fundamental Conventions, OECD Due Diligence Guidelines for Responsible Business Conduct and UN Guiding Principles on Business and Human Rights.
The Lieferkettengesetz covers a broad range of risks related to human rights and the environment in global supply chains and requires companies to identify and address potential risks in the following areas: 

• Human rights: The law requires companies to prevent and address human rights violations in their supply chains, including forced labour, child labour, discrimination, and violations of the rights of indigenous peoples. 
• Environmental protection: Companies are required to prevent and address environmental damage caused by their operations or their suppliers, including pollution, deforestation, and the destruction of habitats. 
• Health and safety: The law requires companies to take measures to ensure the health and safety of workers in their supply chains, including providing protective equipment and training. 
• Business ethics: Companies are required to comply with ethical business practices in their supply chains, including respecting intellectual property rights, combating corruption and bribery, and ensuring fair competition. 

 The law is designed to promote responsible business conduct and prevent harm to people and the environment across global supply chains. It reflects a growing recognition of the need for companies to take responsibility for their supply chains and ensure that their business practices are sustainable and ethical. 

A key element of the Act is the requirement for companies to ensure they have adopted risk-based processes to identify, assess, prevent and remediate risks that are identified within their supply chain. For example, it may not be possible for an organisation to address everything in its supply chain initially, in which case a risk-based approach enables the focus to be placed on the highest-risk areas. 

Risk-based processes may include measures such as supply chain mapping, audit, and the introduction of grievance reporting mechanisms.

What are the Lieferkettengesetz reporting requirements? 

The Lieferkettengesetz imposes reporting requirements on companies. The law requires companies to publish annual reports on their compliance with the due diligence obligations under the law. The reporting requirements are as follows: 

• Description of Due Diligence Processes: Companies must describe their due diligence processes and the measures taken to implement them. This includes identifying and assessing potential risks, engaging with suppliers, and implementing risk mitigation measures. 
• Identified Risks and Risk Mitigation Measures: Companies must identify and describe the potential risks identified in their supply chains and the measures taken to mitigate those risks. 
• Supplier Engagement: Companies must describe how they engage with their suppliers to ensure compliance with the law and how they address any non-compliance issues. 
• Effectiveness of Due Diligence Processes: Companies must assess the effectiveness of their due diligence processes in identifying and mitigating risks in their supply chains. 
• Remedy Measures: Companies must describe the measures taken to remedy any adverse impacts resulting from their business activities or those of their suppliers. 

• Verification Measures: Companies must describe the verification measures used to ensure the accuracy of the information provided in the report. 
• Grievance Mechanisms: Companies must describe the grievance mechanisms available to stakeholders to report potential violations of human rights or environmental standards in their supply chains. 
• Transparency: Companies must disclose information on their supply chain and any subsidiaries, suppliers, or subcontractors. 
• Management Approach: Companies must provide information on their management approach, including their policy commitments, governance, and risk management processes. 

The reports must be published on the company’s website and in the Federal Gazette (BAFA report) and must be available in German. It must cover the previous financial year and must be submitted by 30 June of each year, and are subject to external verification by an independent third party. 

What happens if a company fails to comply with the German Supply Chain Due Diligence Act?

Companies that fall under the requirements of the Act will be responsible for ensuring that they have appropriate processes in place to identify, remediate and report on any human rights or environmental issues within their supply chain.  

Failure to comply may result in a company being fined or restricted from trading in Germany. The Act currently advises that consequences may include: 

• Fines of up to EUR 800,000, or, up to 2% of the company’s annual global turnover. 
• Up to EUR 50,000 financial penalty under administrative enforcement proceedings. 
• Exclusion from winning public contracts in Germany for up to three years. 

Beyond the legislative penalties that may be brought against the organisation, there are also other significant implications when failing to comply including damage to brand reputation and the financial impact of a loss of consumer or shareholder confidence. It can take a very long time to build up positive brand recognition, however, it does not take long to seriously damage it. 

What are the benefits of compliance? 

Overall, complying with the Lieferkettengesetz can bring significant benefits to organizations, including improved reputation, reduced risk, increased efficiency, competitive advantage, and long-term sustainability. 

• Improved Reputation: Complying with the law can help improve an organization’s reputation as a responsible and ethical business. By taking steps to prevent human rights abuses and environmental damage in their supply chains, organizations can enhance their brand image and increase customer loyalty. 

• Reduced Risk: Compliance with the law can help reduce the risk of legal action, fines, and reputational damage. By identifying and addressing potential risks in their supply chains, organizations can minimize the likelihood of human rights abuses or environmental damage occurring and mitigate any negative impacts. 
• Increased Efficiency: Compliance with the law can help increase the efficiency of supply chain management. By implementing due diligence measures and monitoring suppliers, organizations can identify areas for improvement and optimize their supply chain operations. 
• Competitive Advantage: Compliance with the law can provide a competitive advantage by demonstrating a commitment to responsible business practices. This can help organizations attract and retain customers, investors, and employees who prioritize sustainability and ethical business practices. 
• Long-Term Sustainability: Compliance with the law can contribute to the long-term sustainability of an organization’s operations. By taking steps to prevent environmental damage and ensure the health and safety of workers, organizations can reduce their environmental footprint and promote the well-being of their employees and the communities in which they operate. 

What is involved in taking a risk-based approach to supply chain due diligence? 

The risk-based approach is a fundamental principle of Lieferkettengesetz, which requires companies to identify and address potential risks in their supply chains related to human rights and the environment. The law mandates that companies must take a proactive approach to risk management, rather than simply reacting to incidents after they occur. It’s almost impossible for organisations to scrutinise their entire supply chain to identify issues. A risk-based approach enables companies to identify the industries, geographical locations or specific suppliers that present the greatest risk. This insight provides businesses with the opportunity to work more closely with suppliers to improve human rights and environmental processes. Risk-based thinking has been used in many disciplines and is specifically referred to within the OECD Guidance for Responsible Business Conduct, 

The key steps to a risk-based approach to supply chain management to comply with the Lieferkettengesetz are: 

• Identify and Prioritize Risks: The first step is to identify potential risks in the supply chain, such as forced labour, child labour, environmental pollution, or animal welfare violations. Companies should prioritize risks based on their severity and likelihood of occurring. 
• Conduct Due Diligence: Once risks are identified, companies should conduct appropriate levels of due diligence on their suppliers to assess their compliance with relevant laws and standards. This may include conducting audits, site visits, or engaging with stakeholders. 
• Mitigate Risks: Companies must take steps to mitigate identified risks in their supply chains. This may involve communicating and collaborating with suppliers to address non-compliance, terminating relationships with non-compliant suppliers, or providing training and capacity building. 

• Monitor and Review: Companies should continuously monitor their supply chains for potential risks and review their risk management processes to ensure they are effective. This may involve regular supplier audits or conducting risk assessments in response to changing circumstances. 
• Reporting: Companies must report on their due diligence processes and outcomes, including the identification and mitigation of risks. The law requires companies to provide public reports on their compliance with the law. 

Overall, by taking a risk-based approach, companies can identify and address potential risks in their supply chains, promote responsible business conduct, and ensure compliance with the Lieferkettengesetz. This approach helps companies to minimize potential harm to people and the environment in their supply chains and promote sustainable business practices. Additionally, regulators in Germany have stated that they do not intend for the Lieferkettengesetz to create an undue burden on the companies obligated to comply, operating a risk-based approach to supply chain due diligence enables this. 

How to get started on the path to compliance with the Lieferkettengesetz? 

Getting started with the Lieferkettengesetz can be a complex process, but there are several steps that companies can take to begin their compliance journey: 

• Develop a Due Diligence Policy: Companies should develop a due diligence policy that outlines the processes and measures they will take to mitigate risks in their supply chains. This policy should be aligned with the requirements of the law and should be communicated to all relevant stakeholders. 
• Assess Your Supply Chain: The first step is to assess your supply chain to identify potential risks related to human rights and environmental standards. This includes identifying suppliers and subcontractors and evaluating their adherence to international standards and regulations. 
• Implement Due Diligence Measures: Companies should implement due diligence measures to identify and mitigate risks in their supply chains. This includes conducting risk assessments and audits engaging with suppliers to ensure compliance and implementing risk mitigation measures where necessary. 
• Monitor and Evaluate Performance: Companies should monitor and evaluate the performance of their due diligence measures to ensure that they are effective in mitigating risks in their supply chains. This includes tracking supplier performance and conducting regular risk assessments. 
• Publish Annual Reports: Companies should publish annual reports on their compliance with the due diligence obligations under the law. These reports should include a description of due diligence processes, identified risks, risk mitigation measures, supplier engagement, remedy measures, verification measures, grievance mechanisms, transparency, and management approach. 

• Engage with Stakeholders: Companies should engage with stakeholders, including customers, investors, civil society organizations, and affected communities, to understand their concerns and expectations related to supply chain due diligence. 
• Seek External Support: Companies can seek external support from consultants, auditors, and other experts to help them comply with the requirements of the law. 

In summary, getting started with the Lieferkettengesetz compliance requires a comprehensive approach that includes developing due diligence processes, assessing the supply chain, implementing due diligence measures, monitoring and evaluating performance, publishing annual reports, engaging with stakeholders, and seeking external support where necessary. 

Challenges of achieving Lieferkettengesetz compliance 

Organisations working towards and achieving compliance with the Lieferkettengesetz face a number of challenges. These include: 

• Supply Chain Complexity: Many companies have complex and extensive supply chains, with numerous tiers of suppliers. Identifying and assessing risks throughout the entire supply chain can be challenging and resource-intensive. The complexity can also be compounded by the global nature of supply chains, some operating in hard-to-reach or hard-to-access countries. 
• Data collection: Data required to comply goes beyond regular operational boundaries. Data sources with questionable provenance, accuracy and interpretation often become primary sources of information which undermine the basis for the reporting. Data may also be in multiple data formats and there is often an absence of systems to record data in a methodical way that can be used to demonstrate a risk-based approach. 
• The veracity of data: Web-scraped or AI-generated data from sources of unknown provenance lacks the scrutiny necessary to fully understand the risks. Organisations rarely have the resources to undertake credible data checking or independent verification required to report with confidence. 
• Lack of Transparency: Many suppliers may be unwilling or unable to provide full transparency in their operations, making it difficult to identify and address risks. 

• Limited Capacity: Many buyers may lack the resources to undertake such intensive and sustained supply chain management including data collection from numerous disparate sources or sufficiently credible levels of data checking and verification of their suppliers. Likewise, suppliers may lack the capacity or resources to implement the necessary improvements to comply with the law.  
• Cost of Compliance: Complying with the law can be expensive, especially for small and medium-sized companies. The cost of conducting due diligence, monitoring suppliers, and implementing risk mitigation measures can be significant. 
• Knowing what is enough: Understanding what is required to satisfy the regulators and ensure compliance. For more on this read our useful Blog: When is enough, enough? 
• Legal Liability: Non-compliance with the law can result in legal liability, including fines and legal action. This can create additional risk for companies, particularly if they are unable to identify and address potential risks in their supply chains. 
• Coordination with Suppliers: Collaboration with suppliers is essential to implement due diligence processes effectively and as transparently as possible. However, engaging with suppliers can be challenging, especially if they are in different countries with different cultural and legal frameworks. 
• Time Constraints: Companies may struggle to implement effective due diligence processes within the required timeframe. The law requires companies to implement due diligence processes within a specific timeframe, and non-compliance can result in legal liability. 

Conclusion 

The Lieferkettengesetz is a significant development in Germany’s approach to supply chain regulation. This law requires companies to conduct due diligence throughout their supply chains to prevent human rights abuses and environmental harm. It applies to large companies, including those based outside of Germany, and can result in fines for non-compliance. 

The passing of this law marks an important step towards a more responsible and sustainable global economy. While the risk-based approach specified by the Lieferkettengesetz may present some challenges for businesses, it is a necessary measure to effectively address the negative impact that supply chains can have on people and the planet. As other countries consider similar legislation, it is likely that supply chain transparency and accountability will become increasingly important in the global marketplace. Embarking on a journey of improved supply chain due diligence now will likely reduce future disruption when other nations or industries adopt increased levels of due diligence on the supply chain. 

The Lieferkettengesetz is a positive development that has the potential to create a more ethical and sustainable supply chain ecosystem. By prioritizing the well-being of workers, communities, and the environment, companies can build a stronger and more resilient global economy for the future. 

For a quick overview, check out our Lieferkettengesetz infographic.