German Act on Corporate Due Diligence Obligations in Supply Chains

By: Hannah Schon. Food Policy Advisor for Sustainability, Waren-Verein Der Hamburger Börse e.V.

The German Wholesale and Foreign Trade Association (Waren-Verein der Hamburger Börse e.V.) represents the interests of importers of dried fruit, spices and nuts; canned fruits, vegetables and fish; frozen fruits, vegetables and fish products; and organic products. The office also supervises the German Honey Association, the Honig-Verband e.V. and its European umbrella organization, F.E.E.D.M., as well as the German Seafood Association, Deutscher Seafood Verband e.V.

Respecting human rights due diligence obligations has always been the basis of business relationships for German importers in the nut and dried fruit industry, especially as many supplier relationships from countries of origin have existed for decades and have grown steadily. But the implementation of Germany’s new Act on Corporate Due Diligence Obligations in Supply Chains can be challenging, especially for small and medium-sized enterprises (SMEs) due to indirect impact. The Waren-Verein has followed the legislative process for the past two years and knows about the challenges of implementation throughout the food chain.

The Act on Corporate Due Diligence Obligations in Supply Chains —in German, Lieferkettensorgfaltspflichtengesetz, or LkSG— is based on the due diligence standard of the United Nations Guiding Principles, on which the German National Action Plan for Business and Human Rights is based.

The LkSG has applied from January 1, 2023 for companies in Germany with at least 3,000 employees. From January 1, 2024, companies in Germany with at least 1,000 employees will be affected. The due diligence obligations apply to the company’s own operations and to direct suppliers. The Federal Office for Economic Affairs and Export Control (BAFA) implements the act and monitors whether companies meet their due diligence obligations.

However, it was clear from the beginning that the requirements would be passed on to further suppliers that do not fall within the scope (e.g., from large supermarkets to importers). Accordingly, many SME importers have stepped forward to establish sustainable structures as well.

Requirements

• Establishment of a risk management system
• Appointing a responsible person or people within the company
• Carrying out regular risk analyses and issuing a policy statement (code of conduct)
• Establish preventive measures
• Take corrective action and establish a complaints management procedure
• Documentation and reporting (annual reporting to BAFA)

Challenges in the Implementation

We see that companies are adapting very well to the growing demands of sustainability management. Many companies are hiring sustainability managers and embedding responsibility for sustainability issues directly in the management. Sustainability, in particular human rights due diligence, is at the top of the corporate agenda.

But at the same time, it is obvious that the implementation of the new sustainability responsibility can also be challenging and expensive. SMEs, in particular, not infrequently find themselves in a difficult situation: They have to meet the various requirements, sometimes passed on to them by their customers, while at the same time ensuring that producers are sufficiently informed about the law and that the requirements are met.

Complete monitoring and documentation of all supply chains is, for one company alone, very difficult. This is especially true for companies that trade many different nut and dried fruit products in their portfolio. Special software for traceability and risk management as well as certifications provide a remedy. However, these are sometimes large investments that SMEs must first be able to stem, especially as different customers can expect different certifications.

Russia’s war of aggression against Ukraine and the resulting high inflation are driving up production costs and creating pressure in supply chains. Rarely has there been a more challenging time to implement all the sustainability requirements at once, on top of all the multiple crises companies face.

The government has recognized this and given directly affected companies an extended deadline of 2024 to submit an annual sustainability report. This does not mean that requirements are lowered between trading partners in Germany.

The law in general speaks of appropriate risk management. Certainly, not all supply chains need to be monitored equally closely. However, the act refrains from defining adequacy and leaves all parties involved in implementation further in the dark.

Role of the Waren-Verein

Over the last two years, the Waren-Verein has tried to offer the best possible support in approaching the aforementioned challenges. Members of the Waren-Verein have been actively involved in the legislative process from the outset. In our Waren-Verein Sustainability Working Group, members closely followed the German government’s legislative process and critically discussed it with guests from politics, retailers and sustainability consulting agencies. The Waren-Verein facilitates networking and collaboration between companies, allowing them to share information and best practices.

For example, the Waren-Verein and several partners have coached members in the preparation of risk analyses. Members were invited to use a template provided by the Waren-Verein to adopt a code of conduct of their own.

Furthermore, the Waren-Verein has supported some of its members in planning comprehensive training courses for suppliers from countries of origin. We believe it is now up to associations to inform and support suppliers about the new requirements and support them as best as we can. After all, it is often the SMEs that have built their long-term success on decades of fair, trusting and equal relationships with their suppliers.

This year, the Waren-Verein is therefore offering training for suppliers on human rights due diligence in supply chains. In addition, we will discuss further industry solutions, e.g., implementing a complaint mechanism for the German nut and dried fruit industry. We are expecting that such solutions will be developed for many industries in the near future.

A Look into the Future

With a view to our European neighbors France, the Netherlands and Sweden, the German law is not the only one in Europe. With the latest push from Brussels in February 2022 with the Corporate Sustainability Due Diligence Directive (CSDDD), most national acts might be rolled over by the EU directive in a few years’ time. With EU legislation, the requirements could be interpreted even more strictly: for example, civil liability for violations is being discussed. And the scope of application seems to be tightened. We are curious to see how the trilogue negotiations will go. In any case, the Waren-Verein will continue to closely follow this process in the interest of its members.