On March 3, 2021, the German government adopted a draft bill which obliges companies to ensure that human rights are observed throughout their entire supply chain. The aim of the “draft legislation on corporate due diligence in supply chains” (“Draft Bill”) (“Sorgfaltspflichtengesetz”) is to require companies to take steps to prevent human rights violations in their supply chains. This builds on the growing momentum for mandatory human rights due diligence (see our previous Blog Post).

Under the Draft Bill:

  • companies must ensure that human rights are being respected throughout their entire supply chain;
  • companies must establish complaint mechanisms and report on their due diligence activities;
  • companies with more than 3,000 employees must meet their due diligence obligations as of January 1, 2023 (and companies with more than 1,000 employees as of 2024);
  • violations of the obligations set forth in the Draft Bill will be sanctioned with fines, which can amount to up to 2% of the average annual turnover for large companies with more than 400 million euros annual turnover.

In order to implement the UN Guiding Principles on Business and Human Rights in Germany, the government had relied on voluntary engagement for many years and adopted the National Action Plan on Business and Human Rights. However, two surveys revealed that the target of 50% of companies fulfilling the obligations set forth in the UN Guiding Principles was clearly missed. The coalition agreement between Germany’s current ruling political parties provided for the government to take legislative action at the national level in response to this missed target.

Under the provisions of the Draft Bill, a company’s obligations extend to the entire supply chain, with more stringent obligations where a company has greater opportunity to exert influence. The obligations must be implemented by a company in its own business activities as well as vis-à-vis their direct suppliers. Indirect suppliers are included in case the company obtains substantiated knowledge of human rights violations by the supplier.

A company’s due diligence obligations under the Draft Bill involve the analysis of human rights-related risks, the taking of measures to prevent and mitigate human rights violations and the establishment of complaint mechanisms. Furthermore, companies will have to report on their due diligence activities.

While the government has refrained from its initial plan to establish civil liability in case of violations of the new obligations, the Draft Bill provides for fines if companies fail to meet their new due diligence obligations. Companies with an average annual turnover of more than 400 million euros could face fines of up to 2% of their annual turnover for certain violations. In addition, companies can be excluded from public procurement for up to three years in the event of serious violations.

As a next step, Parliament will have to pass the Draft Bill in order for it to come into force and establish the due diligence obligations for affected companies as of January 1, 2023.

How can your organization prepare for increasing due diligence obligations?

We offer practical guidance for asset managers, specifically, in our comprehensive article, Asset Managers: Mastering Non-Financial Risk – The Evolution of Human Rights Due Diligence. In a Blog Post, we cover practical steps for boards to consider with respect to human rights issues more broadly, including due diligence.

Generally, businesses can position themselves for the proposed EU-wide law and other HRDD laws emerging at the domestic level by:

  1. Integrating human rights into group policies and strategic planning processes;
  2. Disclosing how human rights considerations are integrated into strategies, policies and procedures;
  3. Carrying out a human rights impact assessment and taking proportionate counter-measures, as well as communicating internally and externally on what measures have been taken;
  4. Reviewing and reinforcing complaints mechanisms and speak-up programs;
  5. Ensuring the business is well equipped to deal with ‘crises’;
  6. Reviewing the extent to which their board is equipped to address supply chain risks; and
  7. Reviewing the role, resources and expertise of the legal and compliance functions, who should play a key part in addressing these new challenges.

Read more of our Business and Human Rights perspectives here.