What does the Supply Chain Due Diligence Act (LkSG) mean for small companies?

The Supply Chain Due Diligence Act, or LkSG for short, sounds intimidating at first — for us too. Nevertheless, we have noticed how popular it is, have read through the draft law and want to explain to you here in a way that is easy to understand

• why it is justified to introduce a due diligence law,
• what scope it covers
• when it comes into force
• what it means for small businesses
• why you should exercise due diligence in your supply chains even without the law, and
• what you can do to act in accordance with human rights and environmental protection.

What does a duty of care do?

A right to life, liberty, health, education and much more: human rights have been established as the most fundamental rights for all people equally.

However, there are regions in different parts of the world where these fundamental rights are violated and nature is so polluted and exploited that it becomes uninhabitable for plants, animals and humans.

All of this happens, often in secret, because supply chains can become so complex that we often have no idea where our clothes come from.

In our post on greenwashing pitfalls , we already described how companies can use seals and unprotected terms to make their products look better than they are. Many companies use seals that they have created themselves or buy them.

In this way, companies want to convey the feeling of sustainability and responsibility, while their actions reveal the opposite. The problem here is that greenwashing is legal as long as it doesn't provide false information.

In short: Anyone who does not carefully check where the products on offer come from and the effects of production cannot be held liable.

The Supply Chain Due Diligence Act is intended to change that and ensure that companies keep an eye on their suppliers.

What does the Supply Chain Due Diligence Act say?

Basically, companies should be held responsible for monitoring their supply chains to ensure that people and the environment are adequately protected.

Human rights that are directly addressed are:

• Child labor
• forced labour
• slavery
• Security in the person, especially in the workplace
• discrimination
• right to a fair wage

In terms of environmental protection, it addresses in particular:

• Pollution of soil, water and air
• A harmful noise level
• Use, storage, transport and disposal of particularly harmful chemicals.

What does the Supply Chain Due Diligence Act require from companies?

In order to guarantee that there are no violations of human rights and environmental protection in companies' supply chains, companies are held accountable. Here is a checklist of what the law requires of companies:

A competent person or persons should be charged with observing and respecting the law, for example a human rights officer. The responsible person must also regularly, i.e. at least once a year, inform management about the state of affairs, but also when it is identified that there is a problem in a supply chain.

A risk management with risk analyzes with which all relevant business processes are covered and observed. The aim of risk management should be to prevent violations of human rights and environmental protection from arising in the first place. However, if such violations are identified, they should be stopped or minimized within the company's scope of action.

An internal grievance mechanism through which employees within the company can raise concerns. Such concerns should be addressed by the appropriate individuals as quickly as possible so that they can respond if a problem is identified.

Documentation and reporting that gives other people public and free access to the due diligence reports your company produces. These reports must be prepared at least four months after the end of your financial year and be accessible for seven years from then.

What consequences do you have to fear if you do not comply with the Supply Chain Due Diligence Act?

penalties

If you do not object to implementing the obligations in the Due Diligence Act, the Federal Office of Economics and Export Control will levy a fine of up to €50,000.

However, the penalty payment is the last step after a few less dramatic steps, so you won't get a penalty notice out of the blue.

fines

Violations of the obligations for companies, such as the introduction of risk management or documentation and reporting, can result in fines of various amounts.

Depending on the type of violation, you will then have to pay up to €800,000 — such an amount can really hurt, especially if multiple violations are uncovered and a lawsuit is filed.

When does the Supply Chain Due Diligence Act apply?

The larger your company is, the longer it usually takes to adapt to new circumstances. Hardly any company can implement such a fundamental change in care in the supply chain within a few weeks or months.

In order to address this, the Bundestag under Angela Merkel's federal government passed the law in such a way that the date of entry into force was set to January 1st, 2023.

By the way: With this law, Germany is reacting to the guidelines of the European Union for “ due diligence ” . Faster were France, where a due diligence law has been in effect since 2017, and the Netherlands, where a due diligence law regarding child labor was passed in 2019.

Who does the Supply Chain Due Diligence Act apply to?

From the outset, the aim of the draft law was not to let medium-sized companies fall under the law, but only to include large companies and groups with large branches in Germany.

From the beginning of 2023, the law will only apply to companies with a size of more than 3,000 employees in Germany, but this number will be tightened to 1,000 employees by 2024 .

The supply chain law does not apply to small and medium-sized companies, but only to the very largest companies, which means that only just under one percent of all German companies are affected.

However, small businesses are not entirely unaffected as they often buy from or are associated with large companies and may experience changes in prices and offers (at least temporarily).

Why you should always pay attention to fairness and environmental protection

Corporate sustainability is not a "nice-to-have", but a basic requirement to continue living on this planet. If our actions affect the environment to such an extent that it can no longer recover from it, maybe we should reconsider whether the jeans for twenty euros are really worth the price.

You have certainly been on a beach or in a forest and thought to yourself: "How beautiful the world can be." But we also saw the other side: beaches and waters full of plastic, animals in the remains of fishing nets with plastic in their stomachs, and much more.

So that not only you, but also the generations after you can have more of the first and experience less of the latter, you can work with companies that are actively doing something about the pollution of nature.

We also know how easy it is to take for granted having a roof over your head and being free in your opinion, decision and action. But that's not the case for many people. They have to work in conditions that destroy their bodies and are not rewarded in any way.

Even if these situations may be far away from you, you can take matters into your own hands and deal with which companies you buy your products from, where you have them processed and under what conditions this happens. Look at what options you have and choose the one that is fairest.

what can you do now

Especially as a small company or start-up, changes can be initiated quickly that make a big difference. You make your product under great circumstances? Signal this to your customers and prospects . Do you run a restaurant and get your vegetables seasonally and from local farms? Make that part of your identity.

Of course, these decisions are associated with having to set a higher price for your customers. We know that our parents and grandparents skimped on buying the cheapest because there wasn't much money. However, the situation has changed significantly for the better:

When buying their products, many more people pay attention to where they come from, under what conditions they were manufactured and find out what sustainable alternatives could be. Then they'll understand why your jeans cost a little more than H&M's or your burger costs more than McDonald's.

We hope that we were able to help you and answer the most important questions about the Supply Chain Due Diligence Act. Happy with the item? Take a look around, we have more posts that might be relevant to you. Are you missing something or would you be happy if we explain a point in more detail? Write us a comment or an email. We are happy to answer your questions and suggestions!