Update on Supply Chain Act: Draft Available

In our blog article from October 2020, we reported on the discussions surrounding a potential supply chain act – and also highlighted what it would mean for German companies if the requirement for fair, global production were to become law. What was still hypothetical four months ago moved a step closer to reality in the middle of February. At least in a defused form.

After lengthy discussions, an agreement was reached on the supply chain act between the departments of Development Minister Gerd Müller (CSU), Labor Minister Hubertus Heil (SPD) and Economics Minister Peter Altmaier (CDU). The plan is for the draft bill to be approved by the cabinet in mid-March and passed before the German parliamentary elections in September 2021.

The current draft sets out these key points:

• Entry into force follows a phased plan On January 1, 2023, the law will come into force for large German companies with at least 3,000 employees. From 2024 it will also apply to companies with 1,000 or more employees. An evaluation is planned at a later date to decide whether to extend the law further.
• Companies liable for direct suppliers German companies are responsible in terms of due diligence for their own company and direct, immediate suppliers. Problems with indirect suppliers in the upstream supply chain are always relevant when a company is notified of a violation, for example via a complaint from an employee abroad.
• Fines are imposed for violations If companies fail to comply with their duty of care, there is no provision for civil liability – instead, there is the threat of fines. The Federal Office of Export Control is responsible for imposing these fines. The amount of the fines has not yet been determined. Companies can also be excluded from public tenders for up to three years after their violation.
• NGOs and trade unions can sue on behalf of affected people If there are violations of standards in the supply chains, non-governmental organizations (NGOs) and trade unions are given the right to intervene. They can then represent those affected before German courts and, if they agree, file lawsuits on their behalf.

Even in the initial discussions about the supply chain act, two camps emerged: on the one hand, initiatives and NGOs called for a law valid for small and large companies with civil liability as a penalty and responsibility along the entire upstream supply chain. On the other side were business associations that opposed the law’s excessive bureaucracy and feared competitive disadvantages for Germany.

These different camps also significantly influenced the politicians’ discussions. On some controversial points, Peter Altmaier was able to prevail over his colleagues Müller and Heil – which has now led to a “compromise formula”. If you follow the media coverage, you quickly realize that neither of the two camps is completely satisfied: for one, the resolutions are nowhere near radical enough; for the other, they have long been too radical.

With its concrete draft bill, Germany is now the first country in the EU to launch a supply chain act. In the future, the quality promise “Made in Germany” could thus no longer stand for technical product quality alone, but also for fair wages, occupational safety and environmentally friendly processes. The EU Commission is also planning to present a draft for a European supply chain act in the first half of 2021. While German politicians see themselves in a pioneering role, companies criticize the national paths. As the Federation of German Industries points out in its article on the subject, the due diligence obligations in the EU Commission’s legislative proposal could be seen as narrower than in the German draft – civil liability is also still being discussed at EU level.

Politicians are taking the first step toward global responsibility with the supply chain act – but consumers also have a significant part to play in supporting fair production conditions, according to politicians. Thus, Gerd Müller’s quoted call to pay attention to fair products came up again and again in the articles on the topic. At the same time, he noted that the supply chain act does not drive up consumer prices much because the share of labor costs in the final price is low.

Many companies have already recognized in the past that diligence with regard to human rights and environmental protection convinces many consumers – because sustainable thinking is becoming increasingly anchored in our society. Aligning supply networks according to social and ecological standards has therefore long been a matter of course for many companies. This opportunity, which has already been seized by many, will then gradually become mandatory as a result of the supply chain act from 2023. What exactly will change for companies then, we have already shown in our first blog article on the topic. Solutions to demonstrably meet the requirements of the supply chain act can already be found today in the area of quality management.