The Supply Chain Due Diligence Act (the Act) is German legislation that came into force in Germany in 1 January 2023.
As a UK company, you may at first think that it has no application to your business. But the Act imposes wide-ranging obligations on German businesses, which can affect your trading opportunities in the EU.
The Act is indicative of a growing global trend towards the scrutiny of supply chains. We may see more countries follow suit, and greater pressure on UK businesses to comply.
Companies currently affected
The companies that are in scope of the Act, and need to comply are:
- Companies that have their head office, principal place of business, administrative headquarters or branch office in Germany, which also employee at least 3,000 people.
- UK companies with branches in Germany that employ more than 3,000 employees.
While the Act currently applies to these large companies, from 1 January 2024 it will start applying to slightly smaller companies, who have 1,000 employees.
Given these requirements, SMEs in the UK are unlikely to be directly affected. But it is important for SMEs to understand the implications.
Due to the stringent requirements of the Act, more companies who trade in Europe and beyond will be scrutinising the companies they deal with. You may lose out on business if you cannot evidence a level of sympathy to the requirements.
What are the requirements?
The Act imposes due diligence obligations on in-scope companies relating to human rights and environmental risks and violations.
The human rights protections relate to the most serious (and less common) issues like prohibiting child labour, slavery and other forms of oppression. But they also capture issues that companies can easily fall foul of, if they don’t have correct policies in place such as: discrimination, and paying an adequate wage.
The environmental protections relate to preventing the use of mercury in products, and treating mercury waste correctly. It also aims to prohibit the production and use of chemicals under the Persistent Organic Pollutants Convention.
In order to comply, companies must have a compliance management system to assess and report on the risk of ESG abuses within their own companies. They need to conduct risk analyses on a regular basis.
For UK SMEs the most important thing to note is that in-scope companies are required to impose preventative measures on direct suppliers, and due diligence measures to identify and manage risks at indirect suppliers.
As with any legislation, it needs ‘teeth’ if it is going to be effective. Or in other words, the level of penalty reflects how seriously a government intends to enforce it.
The penalties for violating the Act are serious. They include:
- Fines of up to €50,000 for companies that do not take actions recommended by the regulating authorities.
- Fines of up to €8 million for intentional or negligent violations. Or 2% of the company’s average annual turnover if that company’s turnover is more than €400 million.
The commercial risks of non-compliance include reputational damage and the risk of losing business if companies cannot account for their onward supply chain.
Analysis and looking ahead
In terms of what this means for UK SMEs, the implications are currently indirect (as explained above). There are no current plans to put in place similar legislation in the UK – the UK government confirmed this in May 2022.
But a new Corporate Sustainability Due Diligence Directive is coming soon which affects UK companies with an EU presence and smaller UK companies supplying in scope EU companies.
As more countries follow suit in putting in place more ESG-focused legislation, there will be more pressure on UK SMEs to comply. In any event, the legislation simply codifies best practice. So it’s prudent for SMEs to be aware of acts like the Supply Chain Due Diligence Act and seek to put measures in place to comply.