The Supply Chain Duty of Care Act marks a turning point in the responsibility of companies for their global supply chains. With its introduction, companies are now obliged to uphold human rights and environmental standards beyond the boundaries of their own business operations. This article looks at exactly what the law entails, why it is crucial and how companies can implement it successfully.
The Supply Chain Due Diligence Act aims to make companies responsible for compliance with human rights and environmental standards along their entire supply chain. It requires companies to systematically identify risks of human rights violations and environmental damage, take preventive measures, respond to violations and report on them. This law not only applies to direct suppliers, but also extends to all stages of the supply chain.
In our globalized economy, supply chains are often complex and opaque. Incidents of child labor, forced labor and environmental degradation often go unnoticed without strict regulation and monitoring. The Supply Chain Due Diligence Act serves to combat these abuses by forcing companies to make their supply chains transparent and take active action against such violations.
The German Supply Chain Due Diligence Act applies to companies that have their central administration, principal place of business, administrative headquarters, statutory seat, or branch office within Germany and meet the following criteria:
The employee count includes both part-time and full-time staff, with part-time staff being adjusted to full-time equivalents.
Companies that fall under the scope of the German Supply Chain Due Diligence Act are required to undertake several key due diligence obligations to manage risks to human rights and the environment within their supply chains:
a) Risk Management: Implement an effective risk management system to identify, prevent, and mitigate risks of human rights and environmental abuses within their own operations and their direct suppliers’.
b) Risk Analysis: Carry out regular risk analyses to assess the actual and potential impacts on human rights and environmental standards in their business operations and supply chains.
c) Preventive Measures: Take appropriate preventive measures in their own business operations and towards their direct suppliers to prevent human rights and environmental abuses. This includes establishing policies and procedures that ensure compliance with the stipulated standards.
d) Remedial Action: Act promptly to address any adverse impacts on human rights and environmental standards that they have caused or to which they have contributed. This involves taking effective measures to cease, prevent, or mitigate these impacts.
e) Grievance Mechanism: Establish a grievance mechanism that allows affected parties and whistleblowers to report violations of the Act’s requirements without fear of retaliation.
f) Documentation and Reporting: Maintain thorough documentation of their risk management efforts and report annually on their activities and findings related to due diligence in their supply chains.
g) Due Diligence for Indirect Suppliers: While the primary focus is on direct suppliers, if a company has substantiated knowledge of potential human rights or environmental abuses by indirect suppliers, it must also take appropriate steps to address these issues.
1. Fines and Penalties: Companies that fail to fulfill their due diligence obligations under the German Supply Chain Due Diligence Act can be subjected to substantial fines. The Act stipulates that fines can be up to 2% of the company’s average annual global turnover for those companies that have an annual turnover of more than €400 million. For other non-compliance issues, the fines can reach up to €8 million. These fines aim to serve as a significant deterrent against non-compliance.
2. Exclusion from Public Contracts: A particularly impactful sanction is the exclusion from public procurement processes. Companies found in violation of the Act may be barred from being awarded public contracts in Germany for a period of up to three years. This exclusion can affect a company’s business operations significantly, especially for those that rely on government contracts.
3. Enforcement Measures: The Act empowers the Federal Office for Economic Affairs and Export Control (BAFA) to enforce its provisions. BAFA can conduct investigations, request information, and carry out company audits to ensure compliance. Companies are required to cooperate with these enforcement activities.
4. Civil Litigation: While the German Supply Chain Due Diligence Act itself does not establish direct civil liability for companies in German courts for violations occurring in their supply chains abroad, it indirectly increases the risk of civil litigation. By setting clear obligations for companies, it provides a framework that affected parties might reference in civil lawsuits, arguing that companies have failed to meet their legally defined due diligence obligations.
5. Reputational Damage: Beyond legal sanctions, companies face significant reputational risks if they fail to comply with the German Supply Chain Due Diligence Act. Public reporting requirements mean that non-compliance can lead to negative publicity, affecting consumer trust and investor confidence.
The Smart Integrity Platform from DISS-CO is an innovative SaaS funded by BAFA as part of the Invest Grant Program.
DISS-CO’s AI for source scoring plays a critical role in enhancing vendor and complaint risk management in accordance with the Supply Chain Due Diligence Act by offering a comprehensive and nuanced approach to evaluating and managing risks within the supply chain. Here’s how it can help:
1. Automated Risk Identification: By analyzing vast amounts of data from various sources, DISS-CO’s AI can automatically identify potential risks associated with vendors and complaints. This includes risks related to human rights abuses, environmental violations, fraud, and corruption. The AI’s ability to process and evaluate information from news articles, databases, and social media ensures a broad and up-to-date risk assessment.
2. Scoring System for Prioritization: The AI’s scoring mechanism evaluates the severity and relevance of identified risks, allowing organizations to prioritize their responses based on the level of risk. This ensures that resources are allocated efficiently, focusing efforts on the most critical issues first.
3. Enhanced Transparency and Compliance: By systematically assessing risks and documenting the findings, DISS-CO’s AI aids organizations in maintaining transparency in their supply chain operations. This level of transparency is essential for compliance with the Supply Chain Due Diligence Act, as it requires companies to demonstrate their efforts in identifying, preventing, and addressing supply chain risks.
4. Proactive Vendor Management: The AI-driven insights enable companies to proactively manage their vendors by identifying potential issues before they escalate. This can lead to more informed decisions regarding vendor selection, contract renewals, and the development of corrective action plans to address non-compliance.
5. Efficient Complaint Handling: For complaints related to supply chain practices, DISS-CO’s AI can help categorize and assess the validity and severity of these complaints. This allows for a structured and responsive approach to addressing grievances, aligning with the due diligence requirements to respond to and rectify issues within the supply chain.
6. Continuous Monitoring and Improvement: The dynamic nature of DISS-CO’s AI allows for continuous monitoring of the supply chain for new risks or changes in existing risk profiles. This ongoing vigilance supports continuous improvement in risk management practices, adapting to new challenges as they arise.
One example of the sector-specific initiative is cartena-x. Catena-X is an automotive industry initiative aimed at creating a secure, standardized, and interoperable data ecosystem to enhance transparency and collaboration across the entire automotive value chain. It leverages blockchain and other advanced technologies to facilitate the sharing of data and information among manufacturers, suppliers, and service providers, improving efficiency, sustainability, and innovation. By enabling a seamless exchange of data, Catena-X seeks to drive the digital transformation of the automotive sector, supporting the development of new business models and processes that are secure, reliable, and compliant with data protection regulations.
DISS-CO® is an innovative legal tech company with a strong focus on sustainability, risk and compliance.
Cookie | Duration | Description |
---|---|---|
cookielawinfo-checkbox-analytics | 11 months | This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Analytics". |
cookielawinfo-checkbox-functional | 11 months | The cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional". |
cookielawinfo-checkbox-necessary | 11 months | This cookie is set by GDPR Cookie Consent plugin. The cookies is used to store the user consent for the cookies in the category "Necessary". |
cookielawinfo-checkbox-others | 11 months | This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Other. |
cookielawinfo-checkbox-performance | 11 months | This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Performance". |
viewed_cookie_policy | 11 months | The cookie is set by the GDPR Cookie Consent plugin and is used to store whether or not user has consented to the use of cookies. It does not store any personal data. |