The Supply Chain Act is coming in 2023: What companies can expect

The sustainable transformation of the economy and society is progressing. Legislators, particularly in the European Union, are stepping up the pace to ensure fairness, equality and the protection of the vulnerable. A current example is the Supply Chain Act. It is intended 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 to 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 the 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 importance 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 Lieferkettensorgfaltspflichtengesetz."

Supply chain law aims to ensure greater transparency internationally

According to the initiative Lieferkettengesetz.de, the law refers to the UN Guiding Principles on Business and Human Rights (UN Guiding Principles). The UN Guiding Principles 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 of burning or collapsed factories, exploitative child labor or destroyed rainforests have shown that Many companies do not voluntarily fulfill their responsibility in global supply chains sufficiently. Studies by the European Commission and, most recently, the German government have confirmed this."

This means that in a global 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 are obliged to introduce sustainable supply chain management and thus prevent negative impacts on people and the environment. The requirements for companies' due diligence obligations are thus enshrined in law.

Supply Chain Act 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, while companies with at least 1,000 employees will be subject to the regime from the beginning of 2024. The scope of application of the law will then be further evaluated. Important: The Supply Chain Act applies to their own business activities and their direct and indirect suppliers. This means that even if companies themselves are not directly affected by the Supply Chain Act, it is relevant as soon as the company itself is a direct or indirect supplier to a larger company. This means that companies must also check their suppliers for compliance with legal obligations.

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 basic 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 enforceable requirements for companies' due diligence obligations and thus creates legal certainty for companies and those affected, it continues.

Companies need an overview of the entire value chain

Supply chains are therefore part of the general corporate sustainability strategy. The Munich and Upper Bavaria Chamber of Industry and Commerce, for example, points this out. "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 for avoiding negative environmental impacts and human rights violations, thereby contributing to sustainable development."

This means that companies need to gain 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 improve sustainability in their production processes. An opportunity/risk-based approach is important here. A key factor here is communicating with suppliers and raising their awareness. 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 relating to the Supply Chain Act

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

• Policy statement: Drafting 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, defining responsibilities, taking preventive measures
• Complaint management: Implementation of complaint management: confirmation of receipt, discussion of the facts with those affected, derivation of solution measures and subsequent effectiveness monitoring
• Supplier dialog: Contractual assurance of compliance with requirements by direct and indirect suppliers, introduction of control mechanisms and knowledge transfer
• Prevention: Implementation of the declaration of principles in relevant business processes, criteria for sustainable procurement and establishment and safeguarding of control measures
• Reporting obligation: Publication of an ongoing annual report on the fulfillment of due diligence obligations

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

-
Image source: Photo by CHUTTERSNAP on Unsplash