Supply chain law – what is changing for German companies

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The new law of the German supply chain will come into force on January 1, 2023. The economy complains about the high costs, non-governmental organizations consider that the law is too loose.

Renata Jungo Brüngger has had a lot to do lately. Mercedes-Benz’s legal director had to ensure the Stuttgart car company was prepared when the supply chain law came into effect in Germany on January 1. Because then big companies are legally responsible for ensuring that human rights are observed in their supply chains.

The law is controversial. Business representatives complain about the effort involved. For human rights and environmental groups, however, the law does not go far enough. What is behind it?

The “Supply Chain Due Diligence Act”, as it is officially called, initially applies to companies with more than 3,000 employees. According to the Federal Ministry for Economic Cooperation and Development (BMZ), around 900 companies are affected. There are different requirements for them, for their own business area as well as for direct and indirect suppliers.

What will change after the Supply Chain Act?

According to the BMZ, companies must implement a number of measures. Among other things, they must carry out risk analysis, set up a risk management and complaints mechanism and report on them publicly. In the case of violations in their own business or in direct suppliers, the law requires companies to immediately take appropriate corrective measures “to prevent or stop the violation or to minimize the extent of the violation”.

“Not that much will change for us because we have been preparing for it for years,” says Mercedes manager Jungo Brüngger. Supply chain control cannot be implemented simply by pressing a button. The group has agreed corresponding contractual conditions, procurement standards and audit rights with its direct suppliers.

Mercedes-Benz has around 40,000 suppliers in the direct area alone. In addition, there is a multiple of this in the indirect field. “We cannot control these suppliers every day. This is not feasible, even for such a large company.” A risk-based approach should therefore be chosen. Measures are defined for the greatest risks, which are then controlled.

For example in electromobility, which requires batteries and battery cells. “Of course, there are bigger risks here right now.” For example, cobalt comes from countries associated with child labour. “We recognized this and made the supply chain for cobalt more transparent since 2018 and controlled it all the way to the mines,” says Juno Brüngger.

Demand for EU-wide law

“The law is very ambitious in many aspects and will certainly be a big challenge,” says the board member. But one can also say that the law was drafted with a sense of proportion in many aspects. It is positive that there is an obligation to make an effort. “If we as a company can prove in a specific case that we have done everything possible, then this fulfills this requirement,” says Jungo Brüngger. “Small companies would certainly have a harder time implementing it.”

A smaller company compared to Mercedes-Benz is Stihl. Around 20,000 people work for the chainsaw manufacturer from Waiblingen near Stuttgart. The family business has been working for several years to make sustainability an integral part of supplier management, says entrepreneur Nikolas Stihl. But in order to comply with the regulations, considerable additional effort must be made. Stihl also sees the danger of competitive disadvantages from German law, and therefore believes that an extension to EU level or even globally uniform requirements would be helpful.

Criticism also comes from business associations. “This is where the ability of medium-sized industrial companies to act is at risk,” said Karl Haeusgen, President of the Association of German Machine and Plant Manufacturers. He criticized the fact that the companies had to make the reports accessible to everyone – including the competitors. “This will lead to the withdrawal of our companies from entire countries and this will harm the local people, not help them,” says Haeusgen.

Criticism of too much bureaucracy

Dirk Jandura, President of the Federal Association of Wholesale, Foreign Trade and Services, criticized the catalog of questions for reporting by the Federal Office of Economy and Export Control (Bafa). Bafa must check compliance with the law. The list of questions is a “purely theoretical and not practical construction”. The President of the Association of German Chambers of Industry and Commerce, Peter Adrian, also criticized the questionnaire. Bafa carries companies in the worst crisis in decades with 437 data fields. This is “absurdity”. The President of the Federation of German Industries (BDI), Siegfried Russwurm, requested: Bafa must now greatly simplify the procedures and the questionnaire on the reporting obligation.

The second chairman of IG Metall, Christiane Benner, described the law as a good start to the new year. “It is more difficult to understand the refusal on the part of the employers, who tried to prevent the law from taking effect,” said Benner.

“The industry lobby has greatly undermined the law. It has become a toothless paper tiger,” says Viola Wohlgemuth of the environmental organization Greenpeace. Above all, it criticizes “that there are no independent environmental due diligence obligations”. One can only intervene if people suffer damage to their health as a result of environmental destruction by companies. “And this is almost impossible to prove in court, especially for those affected in the countries of production,” says Wohlgemuth.

Beate Streicher from the human rights organization Amnesty International criticizes that the law only applies to very large companies. In addition, there is no regulation of civil liability. The law is a start, but it is certainly not enough. Weaknesses must now be addressed at European level. The coalition agreement states that the federal government is committed to an effective European supply chain law. “It has to be measured against this claim,” says Streicher.

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