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Supply chain law and EU Commission draft


How companies fulfill their due diligence obligations for the environment, climate protection and human rights

24.04.2022 6 Minutes

The social, environmental and climate-related impacts of business activities are no longer only questioned from a social perspective: politicians are now holding companies accountable by issuing specific directives. The example of the Supply Chain Act shows how rapidly the pace of new requirements is increasing. Position your company with foresight. This is the only way you can fulfill necessary due diligence requirements for environmental, climate protection and human rights in the long term.

Supply chain law: German companies under obligation

On January 1, 2023, the Supply Chain Act will come into force in Germany. For the first time, the German government is thus specifying corporate due diligence requirements for the protection of human rights and environmental protection in global supply chains. Child labor, slavery, forced labor and destruction of nature are to be curbed in this way. The due diligence obligations not only apply to the company's own business operations, but also to suppliers in the supply chain.

This means a need for action for the economy. German companies with at least 3,000 employees are affected. Violations could result in penalties of 800,000, 500,000 or 100,000 euros. If the company generates more than 400 million euros a year, even 2 per cent of annual sales will be charged. There is a grace period for companies with 1,000 or more employees: they will not have to comply with the regulations of the new law until 2024.

German companies must take these measures to comply with the Supply Chain Act:

  • Establish a risk management system;
  • Regular risk analyses;
  • Formulate a policy statement on the company's human rights strategy;
  • Taking preventive measures if there is a risk of a violation of human rights or environmental obligations in the supply chain;
  • Implementing remedial measures in the event of violations of obligations;
  • Establish a complaint procedure for violations;
  • Publication of an annual report on compliance with due diligence obligations (no later than 4 months after the end of the fiscal year);

Environmental due diligence in supply chains

Criticism of the German government's Supply Chain Act has come from environmental and climate activists. They call for more explicit corporate due diligence requirements for climate protection and reduction of CO2 emissions in supply chains.

Ecological requirements primarily relate to protecting the human habitat. The issue of climate protection within the supply chain is only considered indirectly: The law prohibits harmful soil changes and water and air pollution. However, explicit requirements mainly refer to three international conventions:

  • Mercury containment: use in the manufacturing process as well as disposal contrary to applicable regulations is prohibited (Minamata Convention).
  • Production and use of chemicals is banned (POP Convention).
  • Import or export of hazardous waste is not allowed (Basel Convention).

EU Commission draft supply chain law: requirements become stricter

The German government's Supply Chain Act was only passed in June 2021. Now, tightening at EU level is on the horizon: In line with the European Green Deal, the European Union presented its Commission draft supply chain law on February 23, 2022. It aims to ensure respect for human rights and environmental protection in global supply chains at the European level.

The requirements of the draft go far beyond those of the German law: companies with 500 or more employees and annual sales of more than 150 million euros would then already be affected. In resource-intensive sectors, the limit is already 250 employees and 40 million euros (e.g. in the food and textile industries or agriculture).

Active monitoring would then be required not only of the company's own business operations and direct suppliers, but also of the entire supply chain.

Environmental and climate protection given greater consideration

One major difference: The German government only indirectly includes environmental impact and climate change in the scope of the law. The EU draft goes further here: It also includes greenhouse gas emissions, environmental pollution, loss of biological diversity and damage to ecosystems in the scope of protection. This makes climate protection an integral part of the supply chain law agenda.

Business leaders will have to question their business strategy to bring it in line with the Paris Agreement target of 1.5 degrees Celsius global warming.

Such a supply chain law will complement the EU's climate policy – including, in particular, the "Fit for 55" approach. This package of measures currently defines stricter climate, energy and transport-related legislation. Companies must expect more ambitious targets for climate protection, energy efficiency, renewable energies and emissions reduction.

Further action

The EU draft directive on supply chain legislation will now be discussed in the European Parliament and the Council of Ministers. Once adopted, member states will have an implementation period of two years.

Affected companies must demonstrate implementation within two years of the law coming into force. For resource-intensive sectors with a workforce of 250 or more, a deadline of four years applies.

Amendments are still possible – both to tighten and to defuse the law. After all, there are supporters in both directions. While industry representatives question the feasibility, climate protection and human rights organisations still see a need for further or stricter regulations.

Call for more transparency

In both European and national politics, transparency demands for products and their value chains are increasing. They are being noticeably advanced in the thematic areas of energy, environmental or climate protection, sustainability and human rights.

The Green Deal 2019 already called for more product transparency. An electronic product passport is to be launched for this purpose, among other things. The call for more transparency and reporting obligations was taken up again in the Circular Economy Action Plan 2020. Legislative measures for more sustainable and transparent products are currently being developed in the Sustainable Products Initiative. Connecting legislative proposals are also still conceivable in connection with the European Union's Supply Chain Act.

Looking ahead and taking responsibility

The final decision on the EU's supply chain law is still pending. But it is already clear that the current requirements will not be enough. Sustainable business practices are increasingly coming into focus. Comprehensive transparency regarding the consumption of energy, emissions, resources, supply chains and circular economy is becoming indispensable.

Therefore, plan and act beyond the current minimum requirements – also with a view to climate protection and the energy transition. Create future-proof structures to fulfill more comprehensive corporate due diligence and reporting obligations in supply chains. Take action and reduce your carbon footprint. Only in this way will you be prepared for potentially even stricter legal requirements in the medium and long term.

Your entry into climate protection and more efficient use of energy

Do you want to sustainably expand climate and energy management in your company in order to be prepared for new requirements along supply chains and reduce costs at the same time? Then take advantage of our climate management packages to get started.

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