CGC Takeaway: Compliance Complexity- More Regulation, More Pressure

4 min read

Jun 7, 2023 10:11:00 AM

CGC Strategies from 28-30 June 2023 in Berlin was a pleasant opportunity to meet like-minded people for professional dialogue. The networking modules were well thought out and organised by we.conect. We gained new contacts as well as new knowledge. Moritz Moser-Böhm conquered the stage and fascinated the audience with a brilliant speech. He thanks every participant for the active exchange and interest. We are happy to share the takeaways from the session below.

Compliance is becoming increasingly difficult to manage for companies as pressure from different directions increases. This includes the tightening of sanctions and a stronger focus on ESG regulations for the supply chain. In particular, the German Supply Chain Act (LKSG) and the EU Corporate Sustainability Due Diligence (CSDD) pose major sustainability challenges for companies and require comprehensive compliance with human rights and environmental standards along the entire supply chain.

Moritz Moser-Böhm on stage at the annual CGC Strategies 2023

Under the German Supply Chain Act (LKSG), companies must fulfil appropriate due diligence obligations in their supply chains with regard to human rights and environmental concerns. The concrete requirements vary depending on the size and number of employees of the company. Already from 1st January 2023, companies with more than 3000 employees must comply with the LKSG, followed by companies with more than 1000 employees from 1st January 2024.

Compliance with due diligence obligations under the LKSG and CSDD to promote human rights and sustainability in supply chains

Under the EU Corporate Sustainability Due Diligence (CSDD), companies are required to identify potential impacts of their activities on the environment and human rights violations, and to develop and implement appropriate prevention action plans. In addition, contractual assurances must be obtained from business partners and compliance must be verified. The specific requirements of the CSDD vary according to company size and turnover. It is expected that from May 2025, EU companies with more than 500 employees and a turnover of more than €150 million will fall within the scope of the CSDD. Companies with an average of 250+ employees and a net turnover of more than €40 million in the last financial year will also fall within the scope from May 2025, provided that at least 50 per cent of this turnover was generated in a high-risk sector that includes textiles, clothing, mineral extraction, agriculture, forestry, fisheries and metalworking.

The growing pressure of Russian sanctions:

Compliance with EU sanctions against Russia poses additional challenges for companies. The tightened sanctions in response to the aggression against Ukraine have a significant impact on European businesses. It is crucial that companies comply with these sanctions to avoid serious penalties. Simultaneous compliance with sanctions, the LKSG and the EU CSDD creates a complex landscape that requires increased vigilance.

The growing importance of ESG supply chain regulations:

Compliance with ESG standards is no longer expected only from large companies, but also from their smaller business partners in the supply chain. Companies that are not directly affected by the LKSG and CSDD requirements still need to ensure that they meet the standards in order to maintain cooperation with larger companies. This dynamic is perceived as costly by many smaller German companies, as compliance with the standards requires an extensive supply chain assessment. Effective solutions are needed to facilitate compliance and minimise the burden on the entire supply chain.

The first complaints show the seriousness of LKSG enforcement

One example of the enforcement of the (LKSG) is the first complaints filed against large retailers such as Ikea and Amazon. Human rights organisations have filed complaints with the Federal Office of Economics and Export Control (BAFA) denouncing alleged violations of the LKSG due to human rights and environmental abuses in their supply chains. This practical test represents a milestone and illustrates the seriousness of the consequences of non-compliance with the legal requirements. If BAFA finds violations, significant penalties can be imposed, including fines of up to 2% of annual global sales. In this case, penalties could be as high as 800 million euros for companies such as Ikea and as much as ten billion euros for Amazon. Such complaints and possible sanctions highlight the urgency for companies to implement effective compliance measures and ensure that human rights and environmental standards are respected along the entire supply chain.

The comparison with the French supply chain law:

Although the French “Loi de Vigilance” is considered less stringent than the LKSG and the CSDD, the prosecution of companies such as Groupe Casino shows that even milder regulations can have serious consequences. This underlines the relevance of strict compliance and the potential scope of the newer, more rigorous regulations in Germany and the EU.

The importance of compliance and sustainability:

Compliance refers to adherence to laws and regulations, while sustainability takes a broader strategic approach. Sustainability involves a company’s responsibility towards its stakeholders and the environment. It is important to realise that sustainability is not “old wine in new bottles”, but a fundamental change in corporate governance that aims to have a long-term positive impact on society and the environment.

What conclusions can we draw from this?

Increasing compliance requirements and regulations are making it more and more difficult for companies to comply. Pressure from multiple directions, including increasing sanctions and focus on ESG supply chain regulations, requires increased vigilance and an effective compliance strategy. Companies need to be aware of the complexity of the regulations and find solutions to facilitate compliance and minimise costs while meeting their responsibilities for human rights and environmental standards along the supply chain. Close cooperation with experts and continuous monitoring of changing regulations are essential to avoid legal and financial consequences.