The Effect of the German Act on Corporate Due Diligence Obligations in Supply Chains
- Marie Flugel
- Dec 24, 2024
- 2 min read
The Rana Plaza Collapse in 2014, the collapse of a textile factory in Bangladesh causing 1,134 deaths and 2,500 injuries, was entirely preventable. But who should take responsibility for it?
Since the disaster, there has been a growing demand for firms that had their goods produced in the factory to be held accountable. There must be a way to increase transparency and responsibility within supply chains worldwide. Firms must follow the law and human rights and environmental standards. Germany responded in 2023 by introducing the Supply Chain Act.
How Does the Law Hold Companies Accountable for their Supply Chains?
The Supply Chain Act places risk management at the centre. Companies with at least 1,000 employees are required to identify and assess risks in their entire supply chain. Section 2 of the Act requires assessment of human rights risks, environmental risks, and risks of violation of human rights-related obligations. The findings must be published in a policy statement. Measures taken to prevent violations are compiled in reports which are made public and scrutinised by the Federal Office for Economic Affairs and Export Control.
Not only German companies but also foreign companies with a branch in Germany are held accountable.
These measures aim to create legal certainty within the supply chain. Companies are placed under a duty of effort to demonstrate they have done everything reasonably possible to prevent violations from occurring within the supply chain.
Industry’s Reaction:
Trade data shows that imports in the high-risk sector of apparel from countries with problematic enforcement of environmental and human-rights standards has decreased by 20% since the introduction of the Act.
However, there are practical challenges for companies. As there are many parties involved in a supply chain, it can be hard to evaluate all risks. Furthermore, measures required to minimise the violation of environmental standards and human rights may be stricter than those taken under the global industry standard. This comes at not only a financial cost, but also a cost in terms of market share.
International Context:
The European Union has since introduced a directive on corporate diligence aiming to increase the effectiveness of national supply chain laws and create a level playing field in the internal market. Once the directive has been transposed into national law, all Member States will be bound by it.
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