Knowledge Center

Supply Chain Due Diligence Act (LkSG): Key Points at a Glance

2 min read

Sep 6, 2023 7:29:00 AM

With the new Supply Chain Due Diligence Act (LkSG), which came into force on January 1, 2023, businesses are entering a new era of corporate responsibility. The law places a particular focus on the protection of human rights throughout the supply chain and ensures that ethical and human rights standards are considered not just domestically, but globally. With this, Germany sends a strong message that human rights violations within supply chains will not be tolerated and calls on companies to act proactively and preventively.

Scope of the LkSG

From 2023, the LkSG applies to companies whose main administration or statutory headquarters is in Germany. Initially, it affects companies with at least 3,000 employees, but from 2024, it will also apply to companies with over 1,000 employees. Not only large corporations but also SMEs should familiarize themselves with the LkSG’s requirements. Especially concerning supplier contracts and delivery terms, breaches can lead to contractual penalties and reputation loss with customers and partners.

Due Diligence Obligations Overview

Under § 3 LkSG, companies are obligated to observe human rights and environmental due diligence within their supply chain. Central to this is integrating these duties into corporate policy. This includes:

Risk identification and conducting a risk analysis: Companies must analyze risks related to their activities and business relationships. The “Know Your Supplier” (KYS) principle, which emphasizes a deep understanding and vetting of suppliers, is also crucial.
Establishing and communicating a human rights strategy: Based on the risk analysis, companies should adopt a policy statement and subsequent measures.
Introduction of preventive measures: Based on the risk analysis, preventative actions should be developed and implemented to avoid potential human rights violations.
Incorporating the human rights strategy in business operations: All business processes must be reviewed considering the human rights strategy.
Taking remedial measures: If there are human rights violations in the supply chain, actions must be taken.
Setting up a grievance system: An accessible and confidential complaint system must be established.
Reporting obligations: Companies must report annually on their due diligence measures.

Extent of the Due Diligence Obligations

Although the LkSG establishes comprehensive due diligence obligations, they are efforts-based and not results-based. This means companies must demonstrate that all necessary measures are taken to prevent human rights violations in their supply chain. However, there’s no guarantee required that such violations are actually avoided.

The specific design and intensity of the obligations depend on various factors, including the type and scope of the business, potential risks, and the degree of influence a company has on its suppliers. The law therefore advocates for a dynamic approach tailored to the individual circumstances, taking into account each company’s realities and capabilities.

Penalty Framework of the LkSG

If companies breach the LkSG provisions, they face not only reputational damages but also significant financial sanctions. The law provides for strict fines for non-compliance, with penalties varying depending on the size and annual turnover of the company.

While natural persons can face fines of up to 800,000 Euros, depending on the severity of the breach, companies can be fined from over 400 million Euros up to 2% of their average annual turnover. This underscores the seriousness with which the legislator views compliance with due diligence obligations and urges company management for thorough and careful implementation of the law.

Conclusion

The LkSG intensifies compliance requirements and highlights liability risks for companies. Business leaders are challenged to carefully review current regulations and integrate them into their business practices. Non-compliance risks administrative penalties and significant fines. Existing compliance management systems can serve as a foundational framework but may require adjustments, especially in contractual agreements with suppliers.