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German Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtengesetz – LkSG)

In July 2021 Germany has incorporated a ground-breaking law with the aim of ensuring ethical business practices and focus on human rights are addressed and implemented in global value chains of German companies. 

The law applies to companies with more than 3,000 employees which have their central administration, principal place of business, administrative headquarters, or statutory seat in Germany, starting from January 2023. For companies with over 1,000 employees, this law applies from January 2024.

The main purpose of this law is the introduction of mandatory due diligence obligations for companies throughout their entire supply chain. Core elements of the due diligence obligations include the establishment of risk management to identify, prevent or minimize the risks of human rights violations and damage to the environment. Human rights encompass issues such as protection against child labor, forced labor, slavery, discrimination, etc. while the protection of the environment in this act focuses on handling, collection, and disposal of hazardous waste.

LkSG includes in the supply chain all products and services of a company and their developments starting with extraction of raw materials all the way to delivery to the end customer. Apart from the company’s own business area, it covers also direct and indirect suppliers to a varying extent. This way, the law does not only directly affect German companies in scope but also indirectly their suppliers through requests for transparency and/or contractual obligations. This approach ensures that all value chain stakeholders are held accountable.

Apart from establishing an effective risk management system (responsible parties, performance analyses, policy statements, preventative measures), companies must establish an internal complaints procedure for reporting human rights and environmental risks and violations. If a violation is identified company must take remedial actions to end or minimise the extent of this violation. Entities are obliged to publish annual reports detailing their due diligence obligations fulfilment which must be assessable on company’s website free of charge and delivered electronically to the responsible supervisory authority.

A significant milestone is the incorporation civil liability. Victims of human rights and environmental abuses in the supply chain have the right to seek compensation. Additionally, the law empowers domestic trade unions and non-governmental organizations to bring proceedings on behalf of affected individuals. The German Federal Office of Economics and Export Control (BAFA) is responsible for overseeing compliance with the law. It possesses the right to enter business premises, summon individuals, and issue specific instructions to rectify irregularities. Penalties and fines are imposed depending on nature and severity of the violation and can be as high as EUR 2 million, or 2% of average annual turnover for larger corporations. Companies may be excluded from participating in public tenders for up to three years.

In conclusion, the German Supply Chain Due Diligence Act sets a precedent for ethical business conduct globally by holding companies responsible for their actions regarding human rights and environmental protection in their supply chains. This legislation serves as a model for other countries looking to enhance their corporate practices. 

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RBI Regulatory Advisory

Raiffeisen Bank International AG | Member of RBI Group | Am Stadtpark 9, 1030 Vienna, Austria  | Tel: +43 1 71707 - 5923