The law imposes mandatory human rights and environmental due diligence obligations on companies in Germany as of 1 January 2023.

By Paul A. Davies, Stefan Bartz, and Alexander Wilhelm

On 25 June 2021, the Bundesrat, the legislative chamber of the German Federal States, approved the Supply Chain Due Diligence Act (Lieferkettensorgfaltsgesetz). The law now only needs to be signed by the Federal President (Bundespräsident) and published before entering into force. Two weeks before, the coalition parties reached a last-minute compromise to adopt the law ahead of the end of the legislative period in September.

This blog post will examine the amendments to the prior draft law resulting from that compromise and consider how the Act will impact companies in Germany (for more information on the draft law, please see Latham’s previous blog).

The Act in a Nutshell

The Act aims to strengthen global human and environmental rights by ensuring responsibility within supply chains for companies based in Germany. Led by the UN Guiding Principles on Business and Human Rights, the German government concluded that requiring companies to make a voluntary commitment to these rights is insufficient if they are to adequately fulfill their human rights and environmental due diligence obligations in their supply chains. To address this insufficiency the Act introduces certain obligations around supply chain due diligence, which German authorities have the power to enforce.

In principle, these obligations extend to a company’s entire supply chain, but they vary in terms of scrutiny depending on the level of influence on the company’s supplier. The first priority is the implementation of due diligence obligations in the company’s own business and towards its direct suppliers. Indirect suppliers must also be included in the due diligence on a case-by-case basis as soon as the company has substantial knowledge of human rights or environmental law violations or related risks. The obligations include (i) conducting a human rights risk analysis, (ii) taking preventive and, when appropriate, remedial action, (iii) establishing complaint mechanisms, and (iv) maintaining a comprehensive reporting obligation towards the general public. The law will apply from 1 January 2023 to all companies with more than 3,000 employees and from 1 January 2024 to all companies with more than 1,000 employees.

Key Amendments to the Act

The Act contains clarifying changes, but also more substantive changes, to the prior draft law.

The most important change in the legislative process concerns the civil liability of companies. A new provision was added to the law, which reads: “A breach of the obligations under this law shall not give rise to civil liability. Any civil liability established independently of this law shall remain unaffected”. German companies raised concerns at the prospect of potential civil liability in Germany for suspected human rights and environmental law violations committed abroad in their supply chains. With the additional wording, the new law clarifies that it will not create any additional civil liability risks for companies. Rather, the new due diligence obligations established to improve human and environmental rights in international supply chains will be enforced and sanctioned only through administrative offense law. Notably, however, the conditions under which civil liability exists within the current national legal framework are not as clear as the law suggests. With ESG litigation on the rise across Europe and in Germany, it remains to be seen how German courts will interpret this additional provision.

Furthermore, another change to the draft law adjusts the scope of the law, meaning that the number of employees will generally be calculated only on the basis of employees working in Germany, and that the number of employees also includes employees sent abroad. In addition, and probably most relevant, the law will now apply beyond companies based in Germany to foreign companies with a branch in Germany, provided they employ more than 3,000 (or from 2024 more than 1,000) employees in Germany. With regard to the calculation of employees within affiliated companies, the parent company’s business also includes the number of employees of affiliated companies if the parent company exercises controlling influence over those companies.

In addition to the Stockholm Convention on Persistent Organic Pollutants and the Minamata Convention on Mercury, the Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and Their Disposal was added to the list of environment-related prohibitions.

EU Sustainable Corporate Governance Proposal Postponed

After the legislative process in Germany has been completed, delays are expected at the European level regarding due diligence around potential human rights and environmental impacts. The EU Commission has postponed the proposal on sustainable corporate governance after a negative opinion from the Commission’s Regulatory Scrutiny Board on the proposal’s impact assessment. The Regulatory Scrutiny Board is an independent body within the Commission that reviews and issues opinions and recommendations on all the Commission’s draft impact assessments. This highly anticipated legal initiative — a key action point promised under the EU Green Deal — was originally planned for publication in June, but is now expected later this fall.

The Commission plans to set up a new regulatory framework on company law and corporate governance, which would enable companies to focus on long-term sustainable value creation rather than short-term benefits. Companies would also be required to monitor sustainability-related matters in their own operations and value chains as regards social and human rights, climate change, and environment.