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German Act on Corporate Due Diligence Obligations in Supply Chains

German Act on Corporate Due Diligence Obligations in Supply Chains Act (the Act), adopted by the German Parliament  on 11 June 2021, entered into force as of 1 January 2023. The Act introduces an obligation for companies over a certain scale to comply with human rights standards in relation to their business activities throughout their global supply chains. The Act applies initially to companies which have their headquarters, business, administrative or registered office in Germany with more than 3,000 employees. In 2024, it will also apply to those with 1,000 or more employees. In order to ensure compliance with the Act, companies need to take urgent and rapid actions in order to eliminate actual human rights risks in their supply chains and prevent any potential human rights risks. Indeed, German companies are expected to guard against risks of adverse human rights impacts in their supply chains around the world, which entails (among others) ensuring fair working conditions, preventing child and forced labor or any modern slavery-like practices at each tier of their supply chains.

Accordingly, companies based in Germany are expected to establish a risk management system (human rights due diligence – HRDD), carry out regular risk analyzes and take appropriate measures to address adverse human rights impacts that may occur in relation to their commercial activities, products or services. To this end, companies are expected to fulfill the following requirements within the scope of their HRDD obligations:

  • Establishing a risk management system including remedial processes to prevent potential adverse impacts on human rights;
  • Designating a responsible person/s responsible for monitoring risk management within the enterprise;
  • Performing regular risk analyses to identify potential adverse human rights impacts;
  • Issuing a policy statement on respect for human rights;
  • Establishing a supply chain wide grievance mechanism that allows reporting potential human rights violations;
  • Carrying out periodic reporting to the public.

While the Act does not provide a specific basis for civil liability in case of non-compliance, there is a monetary fine to be determined based on the company’s turnover and a ban from public tenders for up to three years.

With the enactment of the Act, German companies are expected to make a significant legal and organizational effort to comply with the legal requirements under the Act, to be potentially reinforced by the EU draft directive that is yet to come into force in near future