Major firms early focus of German Supply Chain Act

By Neil Hodge, 18 September 2023

The German Supply Chain Due Diligence Act came into force from 1 January this year, and all eyes are on what the outcome of the first cases will be, and when they might take place.

The legislation, which allows prosecutors to impose fines of up to 2% of firms’ global turnover if they fail to identify and prevent human rights and environmental impacts in their supply chains, applies to companies with a registered office or principal place of business in Germany, as well as foreign companies with a branch office there. It currently impacts companies with at least 3,000 employees, but from 2024, it will apply to those with just 1,000 workers.

Although the act does not give rise to any new liability under civil law, it is expected to prompt non-governmental organisations to more readily file lawsuits for alleged human rights violations in German courts. 

Garment workers

The first complaint filed under the legislation [1] was made by a coalition of labour groups led by the European Center for Constitutional and Human Rights (ECCHR) against Amazon, IKEA, and Tom Tailor for their alleged failures to ensure the safety of employees producing goods on their behalf in Bangladesh, rather than a legal case claiming liability for harm.

The complaint was lodged symbolically on 24 April 2023 – the tenth anniversary of the collapse of the Rana Plaza textile factory in Bangladesh that resulted in the deaths of more than 1,100 people and the creation of the Bangladesh Accord (now the International Accord). This encourages companies sourcing goods from the country to ensure workers occupy safe premises. Neither IKEA nor Amazon are signatories to the accord – along with numerous other major retailers and manufacturers – as both believe their own codes of conduct are sufficient.

Automotive supply chain

On 21 June, the ECCHR filed another complaint [2] under the legislation with the German Federal Office for Economic Affairs and Export Control (BAFA) against carmakers Volkswagen, BMW, and Mercedes-Benz. To date, said the ECCHR, the companies have not presented supporting documents proving they are adequately responding to the risk of forced labour in supplier factories in the Xinjiang region of China.

A report [3] released in December by Sheffield Hallam University in the UK, said the entire automotive supply chain in Xinjiang is potentially affected by the forced labour of Uyghurs. It added the three German automakers are among the companies that maintain supplier relationships with factories that have exhibited serious indications of engaging in forced labour. 

‘Multiple reports have consistently confirmed that independent factory audits are impossible. Therefore, companies cannot rely on audits to fulfil their human rights due diligence,’ said ECCHR Legal Director Miriam Saage-Maass in a statement. ‘In light of the serious human rights violations at issue here, BAFA must immediately examine how VW, BMW, and Mercedes-Benz monitor human rights standards within the facilities of their suppliers in the Uyghur region and work to ensure that they are adhered to.’
None of the companies mentioned in either ECCHR complaint believe they have broken the law. All said they take labour rights and safety in their supply chains seriously.

BAFA said it is examining 16 complaints in total for possible non-compliance. However, some companies – including BMW – said they have not been sent any complaints because BAFA is still reviewing them.

No precedent

Experts have pointed out companies are unsure as to whether they could be found culpable under the legislation because of a lack of guidance and case law.

Simon Geale, Executive Vice President of Procurement at consultancy Proxima, said the legislation should not be judged by the speed at which investigations are conducted, but by whether the law ‘has teeth or not’ to ‘determine if it results in meaningful change.’

‘This is a new piece of legislation, with no precedent and potentially heavy penalties,’ he said. ‘The authorities will want to get it right…The goal of a piece of legislation like this is not to dish out fines – rather, it is to provide guidance and hopefully spark change.’

Geale said the act, ‘establishes a duty of effort but not a duty to succeed, and so many companies, whose aims are to comply rather than drive, will be anxiously watching to see exactly what standards they will be held accountable for and what the consequences will be if they don’t meet them.’

Geale believes German regulators have allowed leniency on reporting timelines as the legislation settles in to make it ‘workable’ and encourage best practice rather than box-tick compliance.

‘There’s a bit of nuance here about complying with legislation and/or driving positive change in the supply chain. These two things can be different,’ said Geale. ‘For example, to comply, organisations need to develop a risk management and monitoring framework – very likely powered by tech – to enable reporting. That could be construed as best practice compliance.

‘However, best practice in terms of driving positive change goes beyond this, into more active supply chain management and supplier development as well as helping supply chain partners to comply. This is more costly and will probably be the focus of those who have sustainability at the core of their brand mission.’