The pandemic has exposed many issues within global supply chains, and countries are taking action. More businesses are centering around sustainability in their environmental, social, and governance (ESG) goals.

For example, one of the largest economic powers in the world, Germany, recently passed the Supply Chain Due Diligence Act (Lieferkettengesetz). The act will go into effect January 1, 2023, and it aims to protect the rights of people who produce goods for the German market.  

What does the Due Diligence Act mean for businesses?

The new Supply Chain Act will require businesses to monitor supply chains for human rights and environmental violations. The draft legislation on corporate due diligence in supply chains is to obligate German companies to better meet their global responsibility.

At a high level, the act requires that companies ensure compliance with human rights and the prevention of environmental degradation, both directly at their worksites and across their entire supply chain.

The legislation will put more focus on ESG initiatives such as:

• Child labor and modern slavery
• Environmental degradation
• Unsafe working conditions
• Discriminatory employment
• Freedom of Association  

Who does the Due Diligence Act affect?  

This act will initially impact companies with a corporate or branch office in Germany or a German workforce of at least 3,000. A year later, the act will apply to companies with a workforce of at least 1,000.

But it doesn’t end there. The new legislation will encourage companies to take responsibility beyond their own factories, warehouses, stores, and corporate offices to encompass their entire supply chain. The responsibility is heavy for tier one suppliers but becomes more graduated the further up in the supply chain that ESG infractions occur.

How can businesses be penalized for violating the new act?

This act is one of the stricter legislations for ESG compliance. If companies violate the legislation, fines can go up to two percent of a company’s sales/annual turnover but are capped at 8 million Euros. In addition, businesses can be prevented from public tenders for a specified period of time, damaging their brand reputation.

German companies will need to analyze any ESG risks, taking measures to prevent and mitigate these violations, setting up grievance mechanisms, and reporting on their activities. To comply, companies will need clear policies and be able to prove to regulators that they have robust digital processes to enforce and measure the effectiveness of these policies.

ESG is taking center stage for global supply chains and for legislators, but companies are finding challenges when facing a dizzying array of ever-changing industry standards. New legislations are increasingly challenging their operating environments, and a lack of data standardization and transparency, making it difficult to turn businesses’ ESG goals into measurable results.  

Through the Avetta One™ Platform, users are provided with sustainability and ESG solutions. With unique benefits for both companies and suppliers, Avetta’s Sustainability & ESG solution offers a holistic view of ESG status across the supply chain by enabling ESG performance to be scored based on individual company goals combined with industry standards.

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