German Supply Chain Due Diligence Act

The German Supply Chain Due Diligence Act (SCDDA) is a new piece of legislation that aims to improve supply chain management and address risks to human rights and the environment.

The law applies to companies with offices in Germany or that employ more than 3,000 people in Germany (reducing to 1,000 as of January 1, 2024), as well as foreign companies with a branch office in Germany of a similar size. These companies are required to investigate their supply chains, establish effective risk management systems in accordance with the UN Guiding Principles on Business and Human Rights, and take appropriate action when risks are identified.

As a supplier, direct or indirect, to a company with offices in Germany employing more than 3,000 people, you may be required to assist in due diligence, risk analysis, and preventive measures. The SCDDA outlines nine requirements for affected companies, including the establishment of a risk management system, the definition of parties responsible for compliance, regular risk analysis, the issuance of a policy statement aligned with SCDDA goals, the implementation of preventative measures within the company and for direct suppliers, remedial action when risks are discovered, a complaints procedure, due diligence concerning risks posed by indirect suppliers, and documentation and reporting on due diligence activities.

The SCDDA also requires companies to assess and report on certain risks present in their supply chains, including forced labour, child labour, unsafe working conditions, negative impacts on communities such as land access and the use of security forces, and environmental harm related to persistent organic pollutants (POPs), toxic chemical exposure, and the unsafe disposal of hazardous waste. The legislation protects two major legal positions: human rights and the environment.

Non-compliance with the SCDDA can have serious consequences for companies. Potential impacts of failing to meet the requirements of the law include fines of up to €800,000 or two percent of average annual global turnover for companies earning over €400 million, exclusion from public contract competitions for up to three years, and the risk of lawsuits from affected individuals, NGOs, and/or trade unions.

The SCDDA also requires companies to obtain supply chain data and attestations from their suppliers in various stages of the manufacturing process, including those located outside of the scope of the law. Suppliers who are unable to meet these demands may damage their brand reputation and become less attractive to major European companies, potentially leading to the loss of lucrative contracts.

It is important for companies, both German and non-German, that fall within the scope of the SCDDA to be aware of these potential consequences and take steps to ensure compliance with the law. The main focus of the SCDDA is on improving supply chain management and addressing risks to human rights and the environment.

By taking proactive steps to address these issues, companies can not only protect themselves from potential legal consequences, but also demonstrate their commitment to responsible business practices.