The German Supply Chain Due Diligence Act aims to make supply chains more transparent, boost human rights and environmental protection. Noncompliance can be costly. Learn which companies are affected, how they can reduce risks, and why the act also presents an opportunity.

According to a report from the German government on business and human rights published in October 2021, 80% of midsize to large companies in Germany are not doing enough due diligence on their supply chains. Under the German Supply Chain Due Diligence Act, in effect January 1, 2023, companies must take responsibility for the actions of all their supply chain partners — from suppliers of components to the businesses that further process or sell the products manufactured.

Here, we look at the companies the act applies to, how it affects them, what they should do, how SAP can support them, and more — including explaining how the new law is an opportunity for businesses.

What are the standards in the German Supply Chain Due Diligence Act based on?

The due diligence act is based on the environmental, social, and governance (ESG) indicators that are leading to new laws worldwide. Human rights due diligence, for instance, is anchored in section two of the United Nations (UN) Guiding Principles on Business and Human Rights, and is already regulated by law in some countries.

Germany is following suit with its Supply Chain Due Diligence Act, which aims to increase transparency, boost human rights, and foster legal certainty and fair competition. Companies that fail to comply face high penalties.

What are some of the unethical practices the new law seeks to eliminate from the supply chain?

  • Child labor, forced labor, forms of slavery
  • Disregard of workplace safety standards
  • Denial of a decent wage

What kinds of environmental harm will it outlaw?

  • Contamination of soil, water, and air, as well as noise pollution and excessive water consumption
  • Manufacture of mercury-added products, use of mercury and mercury compounds, and treatment of mercury waste (Minamata Convention)
  • Production and use of persistent organic pollutants (Stockholm Convention, POPs Convention)

Which companies are bound by the act?

As of January 2023, all companies in Germany that employ more than 3,000 people must comply with the act. From January 1, 2024, a lower threshold of 1,000 employees will apply. Businesses with a smaller workforce might also be affected by the act if they are part of a larger company’s supply chain.

What penalties do companies face for noncompliance?

Businesses that become aware of violations and take no remedial action face a financial penalty of up to €50,000 and administrative fines of up to two percent of their average annual revenue if it is greater than €400 million.

Under the act, companies can also be excluded from the award process for public procurement contracts for up to three years. Companies also have to disclose information and data.

How is this act also an opportunity for businesses?

The standards described are now defining public discourse, and more and more stakeholders are demanding that companies comply. That is why we are also seeing a shift toward sustainable investments in the capital markets.

As such, reputation matters more than ever, and any damage to it caused by violating the German Supply Chain Due Diligence Act might turn out to be more costly than the fines imposed. Compliance offers companies a significant opportunity to stand out from competitors by demonstrating their integrity and resilience.

Equivalent legislation for the European Union is already in the pipeline and is expected to come into force after 2024. Tougher than Germany’s act, its scope will be broader and impose due diligence obligations that reach beyond immediate suppliers and civil liability. By implementing the German act as quickly as possible, businesses can ensure they are ready for whatever comes next.

How can SAP support businesses here?

Sustainability has been central to SAP’s business and product strategies for years. We are working closely with customers on a solution to help companies of any size and in any industry comply with the new law in an efficient and effective way.

This solution is part of our product vision for risk-aware procurement. We focus on three key value drivers: risk transparency in core process, full information transparency, and digital collaboration.

Most companies try to avoid preferring suppliers with a high-risk profile. Therefore, we share up-to-date supplier risk scores within supplier selection activities in the spend management process. Additionally, to achieve a comprehensive supplier risk profile across all immediate suppliers, we work on incorporating many internal and external data sources. And once identified, risks should be reduced and documented in close collaboration with suppliers.

These features are key to establishing risk aware procurement processes in the organization — and can be a first step to embark on a transformation journey toward resilient and sustainable value networks.

For more information, visit ariba.com/lksg.

This story originally appeared on the SAP Germany News Center.