How Germany’s Supply Chain Act changes the corporate approach to due diligence

German supply chain law is part of a growing global trend to hold companies accountable for their sustainable and ethical business practices within global supply chains. The German Supply Chains Act (also known in German as Lieferkettengesetz), passed by the German government in March 2021, requires German-based companies to address human rights and environmental violations within their global supply chains. I’m here.

1. The supply chain law aims to help companies improve the sustainability of their supply chains, but it also presents challenges for complying with due diligence obligations.
2. Challenges include wide-ranging laws that require companies to look deep into their supply chains, and the difficulty of gathering accurate data.
3. To overcome these challenges, companies must implement third-party risk management programs such as due diligence platforms, risk assessment tools, and supplier data management systems.

From 1 January 2023, the law will apply to companies with more than 3,000 employees in Germany, but will be extended to companies with more than 1,000 employees by early 2024.

Failure to comply with the law can result in fines of up to 2% of annual global turnover as well as reputational damage.

Issues raised by the Act

The German Supply Chains Act ensures that affected companies have the opportunity to improve the sustainability of their supply chains and enhance their reputation. However, these companies may also struggle to meet their due diligence obligations under this law.

1. Scalability: One of the unique challenges is that the law focuses not only on a company’s immediate first-tier suppliers, but also on third-party risks, requiring companies to look deeper into their supply chains. is. This is a difficult, if not impossible, task due to the size of the global supply chain network, the lack of visibility beyond first-tier suppliers, and the location of suppliers in jurisdictions with weak labor and environmental standards. This lack of transparency can make it difficult for companies to obtain information about supplier practices and limit the activities of suppliers, especially those deeper in the supply chain.
2. Data Accuracy and Availability: Some suppliers may not have the necessary processes and controls in place to collect and provide the data that companies need to comply with the law. For example, we may not have the ability to track and report environmental impacts, labor practices, or human rights compliance. Therefore, even if a company were able to obtain data from its suppliers, that data could be limited, incomplete or inaccurate. This can make it difficult to assess risks, conduct effective due diligence and take appropriate preventive or corrective actions. The challenges don’t stop here, they also extend to information gathering. Enterprise organizations face complex challenges regarding data collection and analysis, especially when creating and managing surveys that are evaluated at different stages of the supplier lifecycle.
3. Resource constraints: Conducting a due diligence process requires significant resources, including personnel, operations, and financial investment, and can be challenging for small to medium-sized businesses.
4. Data integration challenges: Companies may face the challenge of integrating data from multiple sources and systems to provide a comprehensive view of supply chain risk and performance. An exercise that proves to be complex, expensive and time consuming.

The Road to effective due diligence

Companies should adopt risk-based due diligence on third-party risks, implement a comprehensive third-party risk management program, and invest in systems and tools when complying with German supply chain law. You should achieve this with:

1. Due diligence platform: These platforms provide a centralized location for companies to manage their due diligence processes and track their compliance with German Supply Chain Law. It can include workflows, risk assessments, checklists, remediation, and reporting tools that help you manage end-to-end due diligence activities more efficiently.
2. Risk assessment tool: These tools use data analytics and machine learning algorithms to identify potential supply chain risks in various areas such as environmental, social, governance (ESG), identity, integrity, operations, finance and cyber. Identify, assess and monitor.
3. Supplier data management system: These systems enable businesses to collect and manage data about their suppliers, apply a risk-based approach to collect additional information on high-risk entities, and continuously monitor business relationships from inception to renewal.

In summary, compliance with German supply chain law presents an opportunity to improve responsible business practices. However, many companies face compliance challenges due to extensive legal requirements, supply chain complexity, limited resources, and lack of reliable data.

Leveraging data and technology, companies can improve their third-party risk programs by adopting a comprehensive, risk-based due diligence approach to their supply chains, demonstrating their commitment to responsible, ethical and sustainable business practices. can be shown.