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Supply Chain Due Diligence Act in Mid-Market: Content and Affected Parties (1/2)
Since 2023, the Supply Chain Due Diligence Act (LkSG) enacted by the German Bundestag has been in effect and imposes significant financial penalties for violations.
The mid-market is also affected through indirect reporting obligations as well as an even more far-reaching EU directive for all companies along the supply chain.
Not only is the name of the LkSG complex, but the precise contents of the law and its implementation are difficult to interpret for many affected mid-market companies.
With a two-part blog series, we bring clarity from mid-market for the mid-market:
- Contents, affected parties, and consequences of the LkSG
- Implementation of the law including LkSG checklist
Discover in our two-part blog series whether your company is affected, what requirements apply to you, and how you can quickly and easily implement the minimum requirements of the LkSG.
Additionally, with our final blog post, you will receive a free LkSG checklist for use in your company.
Origin and Purpose
The Supply Chain Due Diligence Act (LkSG for short) is a law applicable in Germany aimed at environmental protection and safeguarding human rights.
The law is based on the UN Guiding Principles on Business and Human Rights adopted by the UN Human Rights Council in 2011. These were adopted in Germany in 2016 through the national action plan for business and human rights (NAP). The goal of the NAP was to ensure that by the end of 2020, at least 50% of German companies with over 500 employees would voluntarily fulfill certain due diligence obligations. However, subsequent monitoring revealed that this voluntary commitment was insufficient, with only approximately 13-17% of a sample of 7,400 companies meeting the requirements. The failure to achieve this goal resulted in the need for statutory regulation—the Supply Chain Due Diligence Act, which has been in effect since January 1, 2023.
Through this legal framework, it is intended to ensure that companies based in Germany source their goods from suppliers who value good working conditions and environmental protection.
Contents of the LkSG
Risk Fields
To protect people and the environment, the LkSG describes a human rights risk (§ 2 subsection 2) and an environmental risk (§ 2 subsection 3), whose prevention is of highest priority. The risk fields include:
Human Rights
Child labor, forced labor and slavery, violations of occupational safety and security measures, violations of freedom of association, discrimination, compensation according to minimum wage, unlawful expropriation
Environmental
Manufacture and use of mercury, use/manufacture of harmful chemicals, disposal and handling of (harmful) waste
Regulations
With the aim of identifying and eliminating risks, the LkSG prescribes various due diligence obligations in § 3 subsection 1 sentence 2:
- Establishment of a risk management system (§ 4 subsection 1)
- Assignment of internal responsibility (§ 4 subsection 3)
- Conducting regular risk analyses (§ 5)
- Issuance of a statement of principle (§ 6 subsection 2)
- Implementation of preventive measures within the company's own business area (§ 6 subsection 1 and 3) and toward direct suppliers (§ 6 subsection 4)
- Implementation of remedial measures (§ 7 subsection 1 to 3)
- Establishment of a complaint procedure (§ 8)
- Implementation of due diligence obligations regarding risks with indirect suppliers (§ 9)
- Documentation (§ 10 subsection 1) and reporting (§ 10 subsection 2)
Mid-Market Companies Are Also Affected by the LkSG
The LkSG affects everyone—not just larger companies, but also mid-market companies are affected through indirect reporting obligations and a possible new EU directive.
Who exactly is affected by the LkSG?
The Supply Chain Due Diligence Act has applied since January 1, 2023, to companies with more than 3,000 employees and starting in 2024 to companies with over 1,000 employees.
How is industrial mid-market affected?
On June 1, 2023, the EU Parliament voted for a far-reaching directive at the EU level, under which mid-market companies with more than 250 employees and 40 million euros in sales are also subject to supply chain law due diligence obligations. The trilogue negotiations between the EU Council, EU Commission, and EU Parliament began this summer.
Starting at the latest from this point forward, companies must verify all direct suppliers for compliance with social and environmental minimum standards. Companies that procure preliminary goods or finished products abroad must assume responsibility for production processes and working conditions at their suppliers, trace deficiencies, and prevent or correct them from the outset or upon discovery.
Through indirect reporting obligations along the supply chain and increased customer requirements for your suppliers, the backbone of the German economy—industrial mid-market—is also affected and must establish itself for the future to remain competitive as a supplier. Violations of this legal obligation result in fines or damages from competitors.
Consequences of Violations
Civil Law
A violation of the LkSG does not result in civil penalties (§ 3 subsection 3).
Penalties under the LkSG
For violations of the LkSG provisions, a penalty of up to 50,000 euros (§ 23) and fines depending on company size and revenue can be imposed (§ 22 subsection 2, § 24).
Exclusion from public procurement for up to three years can also result (§ 22).
All Numbers, Data, and Facts on the LkSG Can Be Found in Our Compact Whitepaper
Learn now in our whitepaper what obligations the LkSG contains, whether you are affected, and how, with the help of Tacto, you can easily and intuitively monitor the LkSG within your supply chain and comply with the minimum requirements.
The mid-market is also affected through indirect reporting obligations as well as an even more far-reaching EU directive for all companies along the supply chain.
