Beginning on January 1, 2023, Germany’s Act on Corporate Due Diligence in Supply Chains (Supply Chain Due Diligence Act) will come into effect, taking aim at social and environmental issues arising in global supply chains. The new act joins relatively recent laws from Switzerland, Norway, the Netherlands, and the European Union to eliminate child and forced labor, improve working conditions, and institute environmentally responsible practices across the global supply chain.
Germany’s Supply Chain Due Diligence Act will strengthen the country’s stance and credibility on human rights, worker safety, and environmental sustainability domestically and abroad. For German-based companies and foreign-based businesses with registered branches in Germany, it’s an opportunity to uncover hidden human rights violations and environmental damage across all tiers of direct and indirect suppliers and act to extricate them meaningfully.
How Will the Act Impact Your Supply Chain?
The Supply Chain Due Diligence Act is the German Parliament’s response to a high degree of non-compliance with the 2016 National Action Plan (NAP) for Business and Human Rights. After learning that only 13%‒17% of 455 companies that participated in a 2020 survey adequately met the NAP requirements, the government agreed to write new legislation that mandated due diligence legislation.
By expanding NAP guidance, the act increases the burden of proof that supply chains are free from child and forced labor, demonstrate strict protections for occupational health and safety, and present minimal environmental harm to people. Companies must file annual reports that detail efforts to identify risks and any efforts to address them effectively, and should be comprehensive enough to withstand government and public scrutiny.
Currently, the act applies to German-based companies with more than 3,000 employees and similarly sized foreign-based companies with registered German branches. But by 2024, smaller companies with as few as 1,000 employees will also be required to comply. In addition, companies of all sizes, both inside and outside the European Union, will likely experience an increase in B2B customer requests for documentation and reports related to their human rights due diligence.
Companies that fail to meet these accountability requirements ‒ regardless of a direct or indirect supplier’s negligence ‒ face fines of up to 2% of annual revenue and a three-year exclusion from public contracts.
Which Steps Should Be Taken Now?
The timing of the Supply Chain Due Diligence Act couldn’t be better for companies across all industries. Investors and consumers alike show greater preference toward businesses and brands that exhibit qualities in line with their already high environmental, social, and governance (ESG) standards.
Based on Gartner’s research, 91% of banks monitor ESG factors as a critical criterion for allocating funds, along with 24 global credit rating agencies, 71% of fixed income investors, and more than 90% of insurers. This mindset is further echoed by global consumers according to Simon-Kucher & Partners, with 85% adopting a ‘greener’ purchasing mentality in recent years and one-third willing to pay more for sustainable products.
“With so much at stake to capture market share and protect long-term revenue growth, businesses across all tiers of the supply chain cannot wait to obtain the capabilities they need to become more sustainable,” advises Logility’s CEO, Allan Dow. “They need unobstructed visibility, real-time predictive intelligence, and efficient operations to continuously sense, analyze, and update activities in their supply chain network to ensure peak and compliant performance at all times.”
Fortunately, many Logility customers are already taking action with the Logility® Digital Supply Chain Platform. The unified platform supports corporate social responsibility with a solution that enables companies to become sustainable faster with data-driven tools such as advanced analytics and artificial intelligence. More importantly, it empowers supply chain networks with the visibility needed to act on evidence of child and forced labor, discrimination, violation in freedom of association, unethical employment, unsafe working conditions, and environmental degradation.
The Logility® Digital Supply Chain Platform drives the capabilities necessary to demonstrate that level of accountability that regulators, investors, consumers, and other stakeholders require, including:
- Protecting brand reputation against false claims with accurate, credible reporting
- Self-managing corrective action plans and measuring and reporting improvements in real time
- Conducting corporate assessments, such as audits, working conditions and environmental impacts
- Increasing visibility across the network to pinpoint areas of improvement and opportunities for competitive advantage
- Tracking factory certification by letting onboarded suppliers enter their codes into the system and maintain them
- Collaborating and communicating transparently with suppliers across all tiers with full automation of assessment information.
The Must-Change Mindset Continues
Germany’s Supply Chain Due Diligence Act is a welcome development for everyone desiring a more just, equitable, and greener world. But businesses must also remember that the act is part of a dynamic patchwork of stringent national laws that their supply chains must follow every day.
Navigating a wide variety of regulations can be challenging without the right support. But with a unified platform, global companies can address individual mandates confidently by leveraging intelligent technologies ‒ such as AI and machine learning ‒ to identify, prevent, mitigate, and resolve operational and supply chain violations.
D/A/CH Regional Sales Director
As VP Sales D/A/CH at Logility, Dario is responsible for supporting customers in their supply chain journey and growing the Logility footprint in the region. He is passionate about helping companies find solutions to successfully transform their supply chain operations, overcome disruptions and equip themselves for new challenges. Prior to Logility, Dario held sales and account leadership roles for supply chain/procurement technology vendors in Germany and the United Kingdom, as well as leading the growth of the supply chain practice in D/A/CH for research advisory firm Gartner.