Nations throughout the European Union are in the process of debating and taking steps to approve due diligence legislation to manage the regulation of environmental, social, and corporate governance (ESG) risks along regional and global supply chains.
During legislative sessions held on June 11th and 25th of 2021, the German government adopted a piece of legislation called Lieferkettengesetz that has become known in English as “The Supply Chain Due Diligence Act (SDDA).” This law strengthens the need for companies doing business in Europe and worldwide to focus efforts to reduce human rights abuses, safety, and environmental risks along their supply chains while completing additional compliance to achieve new benchmarks.
The language of the new German law is similar to a French law that was mandated in 2017, known as the “The Corporate Duty of Vigilance Act (DoV),” that has become the subject of increasing litigation. These legal developments and the confirmation are in the process of drafting additional Human Rights Due Diligence standards that are likely to have far-reaching consequences for businesses operating in Europe and other geographic locations.
Making Sense of the German Supply Chain Due Diligence Act
The Supply Chain Due Diligence Act (SDDA) applies to any companies headquartered or operating a branch location with more than 3,000 employees inside Germany. The law covers every aspect of the product development lifecycle from the procurement of materials, production, and responding to compliance requirements after the sale.
Starting on January 1st, 2023, enterprise organizations and supply partners will be mandated to observe and mitigate environmental, health, safety, and human rights risks along their global supply chains using appropriate preventative and corrective actions. Failure to comply with this law will result in fines to be allocated at a rate of 2% of the annual earnings for companies with more than €400 million ($486 million) in revenues.
This new law will place a much higher compliance demand upon companies operating in the EU to ensure their partners in other parts of the world that may not have the same environmental, safety, and human rights standards to achieve a higher benchmark.
The full ramifications of this legal development will likely create a heightened need for businesses worldwide to think more aggressively about how to counter key ESG risks along their domestic and global supply chains as a consequence of the growth of this legal thinking around the world.
The Evolution of Human Rights Protection Across the EU and Around the World
International governments are poised to take a much tougher look at topics such as child labor, forced labor, modern-day slavery, and human trafficking. Occupational and safety reports, issues of workplace discrimination and inclusion, as well as violations for environmental degradation such as noise pollution, air pollution, the contamination of water systems and deforestation are all topics covered in this legislation. In the modern and interconnected business landscape, it is typical for raw materials to be sourced on one continent, refined on another, manufactured on a third before being distributed back across the globe in the form of finished consumer products. Companies in the future are likely to have to work much harder to achieve compliance targets related to topics and issues that many may have never actively tracked or factored into risk assessments correctly.
Companies operating across Europe will need to take a renewed look at their connection to the various stakeholders connected to their business. This means not only what is happening in their backyard but also working to achieve higher standards at sites and with partners that could be many thousands of miles away.
The ability to vet prospective partners using predictive analytics is likely to become a more important aspect of mitigating risks. Data analysis is the key to removing unnecessary risks from supply chains to realize new and more robust ESG quality standards.
The current German Due Diligence in Supply Chain Act is a significant step towards enforcing much more aggressive human rights protection across the international business landscape. Organizations need to be aware of these changes and take adequate steps to mitigate any potential human rights-related supply chain risks.
In October of 2021, the European Commission meets to discuss further steps to bolster human rights protections. It is very likely at this time that organizations around the world operating in the EU and abroad will need to work much harder to prevent ESG compliance violations from hurting future business success and profitability.
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