The Supply Chain Act: responsibility for the entire supply chain

The Supply Chain Act, officially known as the German Supply Chain Due Diligence Act (LkSG), has since 2023 required German companies to ensure human-rights and environmental standards in their global supply chains. The aim of the Supply Chain Act is to prevent violations of human and environmental rights from the extraction of raw materials through to delivery to the end customer. The Act requires companies to carry out a comprehensive review and continuous monitoring of their supply chains in order to identify and minimise risks.

What is the Supply Chain Act and what objectives does it pursue?

The Supply Chain Act requires companies to review their supply chains for violations of human and environmental rights and to take measures to prevent such violations. The Supply Chain Act is based on the UN Guiding Principles on Business and Human Rights, which were adopted in 2011 and apply worldwide to all companies and states.

The objectives of the Supply Chain Act are clearly defined:

Protection of human rights:

Through suitable measures, companies are to ensure that human-rights violations such as forced labour or child labour do not occur in their supply chain.

Environmental protection:

Companies must also minimise ecological risks that may arise from their own business activity or that of their suppliers.

Remedial measures:

Injured persons are to have access to effective complaints bodies and to compensation.

Who is under an obligation?

The Supply Chain Act covers all companies with their registered office in Germany and at least 1,000 employees, as well as their establishments abroad and temporary workers deployed for longer than six months. Groups with affiliated companies and a total of more than 1,000 employees are also included.

It is important to stress that small and medium-sized enterprises (SMEs) can also be affected indirectly. If, for example, an SME is a supplier to a large company that falls under the Supply Chain Act, it must ensure that it meets the human-rights and environmental requirements of the contracting party. A breach can have not only legal consequences, but also considerable reputational damage that can spread worldwide very quickly.

The LkSG for the SME next door?

Although the legislator has companies with 1,000 or more employees in mind with the LkSG, it also affects small and medium-sized enterprises. Find out more in our white paper Das LkSG einfach umsetzen: Der CLARIUS.LEGAL-Guide für den Mittelstand.

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What deadlines and requirements apply to implementation?

The Supply Chain Act has been in force since 1 January 2023 and has been binding on all companies concerned since 1 January 2024. As regards the reporting duty, the Federal Office for Economic Affairs and Export Control (BAFA) will for the first time review whether the reports are complete as of 1 January 2025. Until then, all companies, regardless of the number of their employees, have time to prepare their reports.

To ensure compliance with the Supply Chain Act, companies must take the following measures:

Submission of a policy statement:

This must be publicly accessible and set out the company’s commitment to complying with human rights and environmental standards.

Performance of an annual risk analysis:

Companies must identify and assess potential and existing risks along their entire supply chain.

Establishment of a risk management system:

Based on the risk analysis, suitable measures to prevent and remedy violations must be introduced.

Establishment of a complaints procedure:

Affected persons must have the opportunity to report violations.

Documentation and reporting:

All measures and results must be documented on an ongoing basis and reported annually, both internally and to the competent supervisory authority.

What sanctions and consequences are possible?

Breaches of the Supply Chain Act can have serious consequences. BAFA can impose fines of up to two per cent of the company’s worldwide annual turnover. In the case of serious breaches, exclusion from public tenders for up to three years may also follow.

In addition, reputational damage can have immense economic effects. A publicly known violation of human or environmental rights can significantly impair the trust of customers, investors and business partners.

Who is responsible in the company?

Responsibility for compliance with the Supply Chain Act lies with the managing director or with the company’s management. It is crucial that the leadership understands the significance of the Act and provides the necessary resources and structures to meet the statutory requirements.

Important questions and answers on the Supply Chain Act

What is the main purpose of the Supply Chain Act?

The Supply Chain Act is intended to ensure that companies review their supply chains for human-rights and environmental violations and take measures to prevent such violations.

Which companies are affected?

All companies with at least 1,000 employees, including their affiliated companies and temporary workers who have been working for longer than six months.

What measures must companies take?

Companies must issue a policy statement, carry out an annual risk analysis, establish a risk management system, set up a complaints procedure, and document and report on an ongoing basis.

What sanctions are threatened in the event of breaches?

Fines of up to two per cent of worldwide annual turnover and exclusion from public tenders for up to three years are possible.

Who bears responsibility in the company?

The management or the company’s leadership is responsible for compliance with the Supply Chain Act.

How can companies implement the requirements of the Supply Chain Act efficiently?

By using IT-supported compliance solutions, companies can meet the complex requirements efficiently and economically.

The Supply Chain Act is a new legal challenge that companies should not underestimate. A careful and proactive approach is crucial in order to minimise legal, financial and reputational risks. Companies that act early and implement suitable measures can not only meet the statutory requirements, but also make an important contribution to improving global human-rights and environmental standards.

We will be glad to support you in implementing the Supply Chain Act!

Take a look at our Business Partner Monitoring LkSG or arrange a no-obligation consultation with our compliance experts directly.

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