Firms face fines for supply chain due diligence failures

21 October 2020

Proposed legislation to make human rights due diligence throughout global supply chains mandatory in Germany will “ripple across tier one suppliers”, analysts have said. 

Victoria Gama, analyst at Verisk Maplecroft, said the proposed new law would “level the playing field on human rights obligations for the country’s major corporate organisations”. 

She said: “While the legislation targets large companies, its effects will ripple across tier one suppliers globally. Extending due diligence efforts beyond tier one is unlikely, as Germany has just started developing a regulatory framework on supply chain due diligence and there is limited practice in Europe in moving further down the supply chain.” 

The law, proposed by Germany’s minister of labour and social affairs, Hubertus Heil, and minister of economic development cooperation, Gerd Müller, will reportedly impact large businesses with a registered office, central administration or principal place of business in Germany, which have over 250 employees, and an annual turnover of more than €40m.

Gama said: “Companies face potentially severe economic sanctions for non-compliance, including fines of up to €5m, exclusion from public procurement procedures in Germany, and potential imprisonment.

“A company will only be liable if the damage caused was foreseeable and would have been avoided if due diligence measures had been in place. To meet this foreseeable and avoidable standard, companies must assess the risks particular to their countries of operation and sector, the likelihood and severity of the damage, and whether they are directly implicated,” she said. 

The law, which was set out in July, builds on Germany’s 2016 National Action Plan on Business and Human Rights (NAP), which saw firms encouraged to voluntarily disclose information around their human rights supply chain risks, and to take voluntary action to address any adverse impacts. 

However, a survey carried out by the German government this year found over 80% of German businesses were not fulfilling their due diligence responsibilities.

Heil said the results had shown that volunteering “is not enough” and Germany needs “a national law to ensure fair competition”.

However, the initiative has faced opposition from firms. In September, a joint statement from the Federation of German Industries, the Confederation of German Employers’ Associations and the Association of German Chambers of Industry and Commerce demanded that “a practicable supply chain law…must not impose obligations on companies that even our federal government is unable to enforce in agreements with other countries.” 

Isabelle Schömann, confederal secretary for the European Trade Union Confederation, told Euractiv that a mandatory due diligence act at the European level would “create the sound basis on which every business can and should work”.

Last month, firms including Adidas and Mars called for EU legislation that requires firms to conduct mandatory human rights and environmental due diligence.

Didier Reynders, the European commissioner for justice, committed to a legislative initiative on mandatory human rights and environmental due diligence obligations for EU companies in early 2021.

Meanwhile organisations including Human Rights Watch, Kindernothilfe and Plan International Germany called on the German government to introduce a “robust supply chains law”.

The organisations emphasised the responsibility of firms to identify, address and remedy children’s rights risks in the supply chain, adding that protecting the rights of all workers and communities is critical to protecting the rights of children.

Maike Röttger, national director of Plan International Germany, said: “From pesticide poisoning in Brazil to child exploitation in Tanzania’s gold mines, children’s rights are violated at the bottom of global supply chains.

“Companies should be required to ensure that the rights of boys and girls are respected along the entire supply chain as well, from raw material through manufacturing and retail.”

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