Understanding the German Supply Chain Due Diligence Act

The German Supply Chain Due Diligence Act (SCDDA) is a significant piece of legislation that aims to promote corporate responsibility and ensure human rights and environmental standards in global supply chains.

Let’s take a look at its key provisions, its objectives, and its potential impact on businesses operating in Germany and beyond.

Background and objectives

Enacted on Jan. 1, 2023, the German Supply Chain Due Diligence Act aims to hold companies accountable for their actions and foster transparency in global trade. Its overarching goal is to prevent and address human rights abuses, enhance sustainability, and create a level playing field for responsible businesses.

Broadly speaking, the law is based on major human rights conventions and uses those conventions to establish requirements or prohibitions to prevent child labor, forced labor, and slavery; maintain occupational safety and health standards; ensure adequate wages and workers’ right to form trade unions or representation bodies; and access to food and water.

By introducing mandatory due diligence measures, the law will enhance supply chain transparency, mitigate risks, and help ensure corporate accountability. While compliance may present challenges, it also opens opportunities for companies to embrace sustainability, protect their brands, and contribute to a more sustainable and ethical business environment.

What are the provisions of the Supply Chain Due Diligence Act?

The Supply Chain Due Diligence Act mandates that German companies (i.e., those with their central administration, principal place of business, administrative headquarters, legal registration, or branch office in Germany) are required to respect human rights by implementing defined due diligence obligations.

This year (2023), the law applies to companies with 3,000 or more employees in Germany; in 2024, it will apply to companies with at least 1,000 employees in Germany. It applies to the actions of companies, their contractual partners, and other suppliers. Practically, this means a company is responsible for everything that happens along its entire supply chain. Key requirements include the following:

- - Risk assessments: Companies are required to conduct regular risk assessments to identify potential human rights and environmental risks associated with their suppliers and business partners.
  - Preventive measures: Companies must implement appropriate measures to prevent or mitigate any identified risks. This could include engaging with suppliers, establishing and enforcing codes of conduct, and training employees to raise awareness and promote responsible practices.
  - Remediation and grievance mechanisms: Companies must have effective grievance mechanisms to enable workers and stakeholders to report abuses and seek redress. They must demonstrate their commitment to resolving issues and rectifying any harm caused.
  - Transparency and reporting: Companies must disclose relevant information related to their supply chains, including their risk assessment procedures, preventive measures, and the effectiveness of their due diligence efforts. Transparency helps stakeholders hold companies accountable and facilitates informed consumer choices.

How could the act affect businesses?

The German Supply Chain Due Diligence Act has significant implications for businesses operating in Germany. Regulated companies will need to invest in developing robust due diligence systems, which may require additional resources and expertise. Compliance costs will likely vary depending on how large a company is, the complexity of its supply chain, and its existing practices and procedures.

Benefits of compliance include improved brand reputation, trust among partners and stakeholders, and reduced risk of legal and reputational damage resulting from human rights violations. Moreover, companies that embrace responsible supply chain practices can gain a competitive advantage by attracting socially conscious consumers and investors who prioritize ethical sourcing.

Final thoughts

In the global context, the spirt of the German Supply Chain Due Diligence Act aligns with other international efforts, such as the United Nations Guiding Principles on Business and Human Rights and the Organisation for Economic Co-operation and Development (OECD) Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas. It also aligns with other legislation in Europe, such as France’s Duty of Vigilance Law, the UK’s Modern Slavery Act, and the proposed European Union mandatory due diligence legislation.

As we said in our article about the U.S. Uyghur Forced Labor Prevention Act, companies should anticipate the passing of more regulations aimed at eliminating forced labor and human rights abuses in global supply chains. They must be prepared (and willing) to audit and assess their operations, engage with their suppliers (and their suppliers’ suppliers), and establish mechanisms to trace the origin of goods to ensure compliance.

Supply chain transparency is the key to compliance. To see how it works, contact us today for a short demo of our transparency solutions, which will empower you to track and trace your supply chain in real time from virtually anywhere in the world and provide a certified, provable, and sharable provenance for your products.

And if you’re interested in learning more about supply chain transparency, check out our blog articles below. “Transparency” means just about the same thing in every supply chain, so consider them as case studies about how it works, why it’s important, and the business benefits it can bring.