The Supply Chain Act is coming in 2023: What lies ahead for companies

21. November 2022
Sarah Köpfer, Environmental Scientist and Head of the Competence Team Climate Protection and Sustainability, Höppner Management & Consultant GmbH

Global supply chains are an expression of international economic interdependence and transnational organization of goods and services. One of the aims of the EU Supply Chain Act is to improve the protection of human rights in a global economy. Companies with at least 3,000 employees must implement the commitments from the beginning of 2023, and companies with at least 1,000 employees from the beginning of 2024.

The sustainable transformation of the economy and society is progressing. In order to preserve fairness, equality and the protection of the vulnerable, legislators, especially in the European Union, are picking up the pace. A current example is the so-called Supply Chain Act. It aims to create a legal framework to improve the protection of the environment, human rights and children’s rights along global supply chains.

The term supply chain refers to the entire process from the extraction of raw materials and the customer’s order to the delivery and payment of the product or service and the manufacture and procurement of supplier parts. Global supply chains are an expression of international economic interdependence and transnational organization of goods and services.

Supply chain law in response to labor under exploitative conditions

The German Federal Ministry for Economic Cooperation and Development sums up the significance of the new set of rules: “Millions of people around the world live in misery and hardship because minimum social standards such as the ban on forced and child labor are disregarded. 79 million children worldwide work under exploitative conditions: in textile factories, quarries or on coffee plantations – also for our products. To change this, the German government has agreed on a draft law with the official name Supply Chain Sourcing Obligations Act.”

Supply chain law aims to ensure greater transparency internationally

According to the Supply Chain initiative, the law refers to the UN Guiding Principles on Business and Human Rights (UNLP). The UNLPs are among the most important internationally recognized standards of corporate responsibility for human rights. In line with the UNLP, the Supply Chain Act aims to strengthen the rights of people along global supply chains vis-à-vis companies. “The law is a response to the devastating incidents in which German companies have been directly or indirectly involved in their foreign operations in recent years. Recurring reports about burning or collapsed factories, exploitative child labor or destroyed rainforests have shown: Voluntarily, many companies do not sufficiently fulfill their responsibility in global supply chains. Studies by the European Commission and most recently the German government have confirmed this.”

This means that in a globally active economy with international interdependencies, the Supply Chain Act aims to ensure greater transparency. The aim is to improve the protection of human rights and the environment in supply chains. The companies concerned will be required to implement sustainable supply chain management and thus prevent negative impacts on people and the environment. The requirements for due diligence by companies are thus enshrined in law.

Supply chain law applies to own business activities and direct and indirect suppliers

Companies with at least 3,000 employees must implement the obligations from the beginning of 2023, and companies with at least 1,000 employees are subject to the regime from the beginning of 2024. Subsequently, the scope of the law will be further evaluated. Important: The Supply Chain Act applies to their own operations and direct and indirect suppliers. This means that even if companies themselves are not directly affected by the Supply Chain Act, the relevance is given as soon as the company itself is a direct or indirect supplier of a larger company. And as a result, companies must also check their supplier companies for compliance with legal obligations.

Now, according to the Federal Ministry for Economic Cooperation and Development, the aim is not to implement German social standards everywhere in the world. The focus is on compliance with fundamental human rights standards such as the ban on child labor and forced labor. Companies in Germany also bear responsibility for this. They must ensure that human rights are respected in their supply chains. The law sets out clear and implementable requirements for companies’ due diligence obligations and thus creates legal certainty for companies and those affected, it adds.

Companies need to gain an overview of the entire value chain

Thus, supply chains belong in the general corporate sustainability strategy. This is pointed out, for example, by the Chamber of Industry and Commerce of Munich and Upper Bavaria. “Sustainable supply chain management is about taking a holistic and systemic view of all stages of the supply chain – from direct suppliers to raw material extraction. Sustainable supply chain management paves the way to avoid negative environmental impacts and human rights violations, thus contributing to sustainable development.”

This means that companies need to obtain an overview of the entire value chain, right through to raw material extraction, define where key sustainability issues and fields of action lie, and also whether and how a company can also encourage its own suppliers to be more sustainable in their production processes. An opportunity/risk-based approach is important here. A key factor here is communication and raising awareness among suppliers. The aim must be to make the entire logistics value chain as sustainable as possible. The key question is: Under what working conditions and with what impact on the environment are raw materials extracted, products manufactured and put on sale?

Services related to the Supply Chain Act

Companies must implement/ensure the following measures both within their own business unit and with direct suppliers:

  • Policy statement: Draft a policy statement on the company’s human rights strategy, identified priority risks, and expectations of employees and suppliers.
  • Risk management: anchoring risk management in business processes and procedures; regular risk analysis, definition of responsibilities, taking preventive measures
  • Complaint management: implementation of complaint management: acknowledgement of receipt, discussion of the facts with those affected, derivation of solution measures and subsequent effectiveness control
  • Supplier dialog: Contractual assurance of compliance with requirements by direct and indirect suppliers, introduction of control mechanisms and knowledge transfer.
  • Prevention: Implementation of the policy statement in relevant business processes, criteria for sustainable procurement and establishment and safeguarding of control measures.
  • Reporting obligation: publication of a continuous annual report on the fulfillment of due diligence obligations

We at Höppner Management & Consultant support you in fulfilling these obligations!

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