What does the new Supply Chain Act mean for companies?

Collapsed textile factories, polluted rivers, child labor. For a long time, compliance with social and environmental standards by suppliers of globally active companies was voluntary. New legislation is to oblige companies to prevent human rights violations and environmental damage along their entire supply chain. In February 2022, the European Commission presented the draft for a European Supply Chain Law. What does this mean for companies in concrete terms? How can companies champion new regulations set under the revised Supply Chain Law? Scroll down for an overview.

In the past, compliance with social and ecological standards by suppliers of globally active companies was a voluntary act. However, experts in human rights, society, and politics believe this has led to unfavorable outcomes. The revised Supply Chain Act aims to create a legal framework through which human and environmental rights along global supply chains will be improved.

The European Supply Chain Law

On March 10th, 2021, the European Parliament adopted the legislative proposal “Legislative Report on Human Rights and Environmental Due Diligence Obligations of Businesses”. The proposal of the European Commission followed on February 23rd, 2022. The European Parliament and the European Council will discuss the Commission’s draft in the next step. If a European supply chain law is enacted, the governments of the respective countries are required to transpose it into national law. This would mean that existing supply chain laws such as the German Supply Chain Act, the Dutch Supply Chain Act or, for example, the French Loi de vigilance would have to be adapted to adhere with the regulation of European directives.

The German Supply Chain Law

On June 11th, 2021, the German Bundestag passed the “Act on Corporate Due Diligence in Supply Chains”. This means that companies headquartered in Germany with 3,000 employees or more will in the future be required to analyze human rights risks in their supply chains, take preventive and remedial measures, establish complaint procedures, and report on these activities.

A comparison of the German and European Supply Chain Laws

Both drafts fundamentally aim to ensure that human rights are respected in business and that global supply chains are presented more transparently. However, there are significant differences between the two approaches in terms of size and scope of application for the obligated companies.

Unlike in Germany, the EU Commission requires all EU companies with more than 500 employees and sales of over 150 million euros to test their primary products. For companies operating in certain resource-intensive sectors, such as textiles, agriculture, forestry and fisheries, or in the extraction of mineral resources and metals, the threshold is 250 employees and net sales of 40 million euros. The law would apply on the same principle to companies from third countries operating in the EU and generating a corresponding turnover within the EU. This proposal applies not only to the companies themselves, but also to their subsidiaries and the activities in the value chain carried out by companies with which the company has a business relationship.

Pros and cons for companies

In principle, the European Supply Chain Law would have an impact on competition in that there would be more legal certainty for companies as a result of EU-wide harmonization of due diligence and accountability obligations. Disadvantages for companies in European competition, such as those currently resulting from existing national supply chain laws, would, in some cases, be eliminated. Competitive disadvantages for companies that already invest voluntarily in sustainable supply chain management could also be reduced.

However, it should also be noted that it is an enormous challenge for globally active companies with highly fragmented supply chains to identify deficiencies that exist along their supply chain. To meet the corporate due diligence obligation under the German Supply Chain Law as well as to prepare for the upcoming EU directive, companies need a holistic overview of their social and environmental impacts. This enables them to derive targeted measures that also help meet the requirements of various stakeholders such as consumers, investors, and NGOs.

The German Supply Chain Law	The European Supply Chain Law
Scope: From 2023, initially for companies with 3,000 employees; to be gradually extended to SMEs from 2024	Scope: As of March 2022, the law applies to companies with more than 500 employees and sales exceeding 150 million euros. The threshold is lower (250 employees and 40 million euros) for companies operating in the following sectors: textiles (including total sales), agriculture, forestry and fishing (and related food production and wholesale), extraction of mineral resources and metals (including trade). The Directive also applies to non-EU companies with a corresponding turnover in the EU.
Responsibility: As of March 2022, the law applies to gradation by level of influence. Indirect suppliers up to the raw material producer are only then informed of human rights violations at this level. Ultimately, it depends on the exact depth of analysis that is required.	Responsibility: Companies have obligations regarding their actual and potential adverse human rights impacts with respect to their own operations, the operations of their subsidiaries, and the operations in the value chain carried out by companies with which the company has a business relationship.
Extent: Protection of the environment is covered by law as soon as environmental risks can lead to human rights violations and is additionally integrated via two international agreements on protection against the health and environmental hazards of mercury and persistent organic pollutants.	Extent: The European Parliament’s proposal targets environmental and social areas, including fair wages, safe working conditions, children’s rights, forced labor, slavery, and environmental degradation affecting natural resources for food production, access to clean drinking water, and deforestation.
Potential consequences: Fines amounting to 10% of turnover; up to three years’ exclusion from public tenders.	Potential consequences: Depending on the jurisdiction, civil liability is limited to direct deliveries.