The German Supply Chain Due Diligence Law
The Federal Act on Entrepreneurial Due Diligence Obligations in Supply Chains – Lieferkettensorgfaltspflichtengesetz or LkSG – was passed in June 2021, and takes effect on 1st January 2023.
The aim of the law is to hold companies responsible for upholding social and environmental standards in their supply chain. Businesses will be required to carry out risk analysis on their entire supply chain, with particular focus on ethical violations (slave labour, child labour, trafficking, working conditions) and environmental impact (air & water pollution, soil damage, water consumption etc).
Who does it affect?
Starting in 2023 companies with 3000+ employees. In 2024 this is lowered to 1000+ employees.
- Companies headquartered in Germany
- German subsidiaries of multination companies
- German holding companies for foreign parent companies
- Multi-national companies with offices in Germany
The law establishes responsibilities for the entire supply chain from raw material to delivering final product. These responsibilities are tiered based on the different stages within the supply chain:
- The company’s own operations
- Direct suppliers
- Indirect suppliers
What are the requirements for my business?
If the LkSG applies to your business it is recommended to take active steps to know your supply chain and investigate the levels of social and environmental compliance by every supplier in the chain.
For their own operations and their direct suppliers, in 2023 companies will be required to:
- Draft and adopt a policy statement on respecting human rights
- Carry out a risk analysis: by implementing procedures for identifying disadvantageous impacts on human rights
- Engage in risk management (incl. remedial measures) to prevent potential negative impacts on human rights
- Establish a grievance mechanism
- Implement transparent public reporting
- Immediately remedy any violations and implement prevention measures.
For their indirect suppliers, if a violation is identified, companies must:
- Conduct risk analysis
- Implement strategy to minimise and avoid problem
- Establish prevention measures.
Does it apply to suppliers in other countries?
Yes. Companies will be responsible for ensuring standards are observed across the entire supply chain. With stricter measures required for your direct suppliers.
How will it be enforced?
The Federal Office for Economic Affairs and Export Control will enforce the act. Complaints can be filed directly by individuals affected by human rights violations. Non-compliance could result in fines of up to €800,000 or 2% of turnover (where a company’s annual turnover averages €400m+). For severe violations a company can be blocked from winning public contracts for 3 years.
Is it expected a business relationship should be terminated if violations are discovered?
Only in the case of the most severe violations – and following any failure of prevention measures – would termination of a supplier relationship be expected. It is the intention of the Act to drive up human rights standards in supply chains through collaboration and continual improvement.
Will this law become Europe wide?
It is the goal of the German government that this can help set the standard for a European wide set of rules. This will likely take several years.
What social standards are covered?
- Bodily integrity and health
- Freedom from slavery and forced labor
- Protection of children and freedom from child labor
- Freedom of association and the right to collective bargaining
- Protection against torture
- Fair working conditions (safety at work, breaks)
- Environmentally related obligations to protect human health.
What environmental standards are covered?
Environmental concerns that could violate human rights, for example:
- Water pollution
- Air pollution
- Excessive water consumption
- Excessive noise
- Hazardous waste
For more information see here.
How RADIX Tree works
RADIX Tree enables you to connect with your supply chain partners – much like a social network – to share and collect vital sustainability information on your products. RADIX Tree’s flexibility also means multiple compliance processes can be managed on the same system. The platform can be developed further for consumer interaction, certification, quality assurance & nutrition claims.
Step 1: Connect
Suppliers are invited to RADIX Tree as Business Relationships. Suppliers repeat process connecting with their own suppliers.
Step 2: Share
Once connected they can start receiving their suppliers data. Custom transaction templates ensure suppliers can easily complete the required information on their products.
Step 3: Verify
Data is verified automatically according to customisable verification rules. For example, certification and other parameters. The alerts system ensures quick risk mitigation.
Why RADIX Tree?
Easy to implement – Even with complex supply chains with multiple compliance requirements.
Cost effective – Subscriptions are scaled according to the number of connections needed.
Save time and effort – End reliance on paper and spreadsheets, with both operators and suppliers sharing data efficiently, repeating a familiar process.
Better quality data – Expert created templates, with responses validated in real time
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