To fulfill its responsibility to protect human rights, the German government published the National Action Plan for Business and Human Rights (NAP) in 2016 – implementing the UN Guiding Principles on Business.
The NAP was an important first step and relied on companies implementing the requirements on a voluntary basis.
The status of this voluntary implementation was reviewed from 2018 to 2020 as part of a broad monitoring process. The process examined the extent to which German-based companies with more than 500 employees meet their human rights due diligence obligations under the NAP.
The results showed that only 13 to 17 percent of the companies reviewed met the requirements of the NAP, meaning that the coalition government’s target of at least 50 „NAP compliance“ was missed.
In this case, the coalition agreement envisages the German government taking legislative measures and pushing for binding verification obligations at the European level.
Companies that are within the law are required to apply appropriate due diligence throughout the supply chain. They should establish a due diligence system based on the key elements of human rights due diligence. German National Action Plan for Business and Human Rights (NAP).
Under Section 3 of the Supply Chain Due Diligence Act, due diligence obligations include:
Establishing a risk management system
Definition of internal responsibility
Regular risk analyses (once a year and on an ad hoc basis)
Establishment of preventive measures in own business and with direct suppliers
Implementation of corrective actions
Establishment of grievance mechanisms
Conducting risk-based due diligence on indirect suppliers
Documentation and reporting
Companies are required to review the effectiveness of preventive measures, corrective measures, and grievance mechanisms on an annual basis or when significant changes occur.
Due diligence obligations for companies generally apply to the entire supply chain, but in practice, they are graduated:
In own business and with direct suppliers (direct contractual partners): Obligation to carry out risk analysis, preventive and corrective measures.
For indirect suppliers (in the deeper supply chain to raw material suppliers): Obligation to carry out risk analysis, and preventive and corrective measures if the company has „substantiated knowledge“ (see question 6) of human rights violations.
Affiliated companies within the meaning of Article 15 of the Law on the Stock Exchange over which the company has a decisive influence are part of the company’s own operations. The supply chain is defined from the extraction of raw materials to the delivery of the product or service to the end customer. It covers „all steps in Germany and abroad that are necessary for the production of products and the provision of services“. This also includes the use of necessary services, such as transport or interim storage of goods.
Companies are not expected to guarantee that they will remediate all supply chain risks. However, companies are expected to take a careful look at the risks in their supply chains and take appropriate measures (e.g. training) to eliminate or mitigate the risks.
In addition, there will be no liability for the actions of third parties in the supply chain. The law that has now been adopted clarifies that the law does not create additional bases of liability. Workers abroad can already today sue in German courts for compensation if they believe that a German company has violated their rights. However, as a rule, the law of the country where the damage occurred is applied.
What is new in the Supply Chain Due Diligence Act is that those affected have the option of authorizing domestic trade unions and non-governmental organizations (NGOs) to represent them in civil litigation through the legal instrument of representative action. The trade union or non-governmental organization must have a permanent presence, must not be for-profit, and, in accordance with its statute, must deal with human rights on a more than temporary basis.
Companies must implement due diligence processes regarding the risks associated with indirect suppliers (with whom they do not have a direct contractual relationship) if they have „reasonable knowledge“ of possible human rights violations in the downstream supply chain.
The law defines „substantiated knowledge“ as „factual indications that make it possible to violate human rights or environmental obligations at an indirect supplier.“ This is „verifiable and serious information about a possible violation of human rights or the environment.“
For example, these factual indications may include:
The company received the information through its complaint mechanisms
The competent authority informed the company
Human rights organizations report abuses
It is widely recognized that there are certain risks to human rights in the region or industry of the indirect supplier
There have been incidents with the indirect supplier in the past.
If there is substantiated knowledge, the company must:
Conduct a risk analysis
Determine appropriate preventive measures against the offender
Establish and implement a concept to minimize and prevent relevant infringement
The question of adequacy is often raised in the context of what influence, for example, a company has over a much larger supplier. Basically, when conducting due diligence – i.e. risk analysis, preventive and corrective measures – the „appropriate way of acting in accordance with due diligence obligations“ is defined by the following criteria:
Nature and scope of business activity
The company’s ability to influence the direct offender
Typically expected severity of violation, reversibility of violation, and probability of violation.
The nature of the causal contribution to risk.
The use of this flexible term is intended to take into account the fact that companies and their supply chains vary widely.
If smaller companies are direct suppliers to companies covered by the Act, they may be required to carry out human rights due diligence processes through their contractual relationship (which may, for example, include human rights expectations).
However, under the Supply Chain Due Diligence Act, many obligations cannot be delegated by their very nature. For example, even if a large customer covered by law requires a smaller supplier to analyze risks to a certain extent, the smaller company is not subject to the obligation of reporting and disclosure to the relevant authorities and the public. Nor would it be subject to BAFA control measures or sanctions.
A number of support services are already available for SMEs. For example, the Responsive Business Hub within the Serbian Chamber of Commerce and Industry offers individual, free, and confidential advice on how to implement human rights due diligence in business processes.
The requirements of the German Supply Chain Due Diligence Act are based on the UN Guiding Principles on Business and Human Rights. This internationally recognized frame of reference clearly foresees that states have a duty to protect human rights („state duty to protect“), and companies have a responsibility to respect human rights („corporate due diligence“).
The German Supply Chain Due Diligence Act provides companies with a clear, proportionate and reasonable legal framework for fulfilling their human rights due diligence obligations, based on the requirements of the UN Guiding Principles.
Many companies have already addressed human rights monitoring requirements and implemented appropriate processes since the publication of the UN Guiding Principles.
The advantages of the law are primarily seen in legal clarity, transparency, and equal conditions.
Serbia is among the countries that issued the Guide to Human Rights and Business Serbia.
German companies are not required to ensure that all human rights are fully guaranteed for all people employed in their operations and supply chains. The duty to protect human rights rests with the state, above all with the state where the people live.
In this regard, German companies are not expected to guarantee similar standards of human rights in other countries as, for example, in Germany.
However, an „adequate and effective“ risk management system is expected to be in place with respect to human rights risks and environmental obligations (Section 4, paragraph 1).
Adequacy is based on the following criteria: The nature and scope of the business activity, the ability of the company to influence the direct perpetrator of the violation, the typically expected severity of the violation, the reversibility of the violation, and the likelihood that the violation will occur as well as the nature of the causal contribution to the risk (Article 3, paragraph 2).
According to Article 4, para. 2, „effective“ means „measures that enable the identification and minimization of risks to human rights and the environment, preventing, stopping or minimizing violations of human rights and environmental obligations, if the company has caused or contributed to these risks, violations within the scope of the supply chain“.
The principle of „engagement before withdrawal“ („Befähigung vor Rückzug“) is explicitly contained in the law. This means that German companies are encouraged not to withdraw from regions with lower standards, but to work locally with their suppliers or within the industry to minimize risks.
Even in cases of serious violations of human rights, the termination of the business relationship is justified only if the following factors are present:
A serious violation
Attempts to mitigate risk fail within a certain time frame
There are no other mild mitigation measures
Increasing influence is not promising
The law clarifies that the mere fact that the state has not ratified the relevant contracts does not require termination of the business relationship.
German companies must submit an annual report to BAFA (Federal Office for Economic Affairs and Export Control) on the implementation of due diligence obligations; they must also publish the report online.
The report must provide comprehensible information on:
What human rights and environmental risks has the company identified
What has the company done to fulfill its due diligence obligations
How the company evaluates the impact and effectiveness of the measures taken
What conclusions does he draw from the assessment for future action
The report must be publicly available online no later than four months after the end of the fiscal year and must be available for seven years. Business and business secrets must be properly protected. The electronic reporting format is being developed to reduce the burden on businesses.
The enforcement of the law is controlled by the Federal Office for Economic Affairs and Export Control (BAFA).
German companies must submit their report at least four months after the end of the fiscal year; the authority reviews the reports and also conducts inspections.
The competent authority can require companies to take concrete measures, demand a plan within three months, summon persons and demand notifications, enter the business premises, and inspect and review documents and records.
For enforcement purposes, the authority may impose periodic penalties. They can amount to 50,000 euros.
The law predicts fines for German companies or their suppliers in the supply chain if they violate certain obligations (intentionally or through negligence). This includes, among others, if the risk analysis is not carried out or is incomplete, corrective measures are not taken or not taken in time, or if documentation is not carried out.
In addition, German companies can be excluded from public contracts for a period of up to three years, if the fine is in a certain minimum amount (threshold level depending on the severity of the offense: 175,000 euros or 1,500,000, 2,000,000, 0.35% of annual turnover) is imposed.
In April 2020, EU Justice Commissioner Reynders announced a draft binding EU-wide regulation on due diligence in supply chains. At the same time, in March 2021, the European Parliament adopted a resolution with recommendations to the Commission on corporate due diligence and responsibility. This means that the European Parliament recommends that the EU Commission introduce a European directive on due diligence. On February 23, 2022, the EU Commission presented a draft directive on corporate sustainability obligations. As a directive, the regulation would have to be implemented in the national legislation of the member states.