Navigating the German Supply Chain Due Diligence Act for Supply Chain Transparency
SupplierGATEWAY is dedicated to helping buyers and suppliers operate with maximum sustainability. The German Supply Chain Due Diligence Act (SCDDA) which became law in June of 2021, enters into force on 1/1/2023. This law intends to protect and strengthen human rights and the environment via the supply chains of companies that operate within Germany.
In this article, we’ll take a closer look at the German Supply Chain Due Diligence Act and discuss the steps your company needs to take to comply with the law. We’ll also provide some tips for how to reduce risk in your supply chain and increase sustainability.
Overview of the German Supply Chain Due Diligence Act
The German Supply Chain Due Diligence Act (SCDDA) became law in June of 2021 with the aim of mitigating risks of forced labor and human trafficking within the German supply chain. While SCDDA focuses primarily on the “social” aspects of ESG, the act does recognize that changing environmental factors heavily impact the quality of overall human health.
The Act applies to companies with more than 3,000 employees in 2023, expanding to companies with more than 1,000 employees in 2024.
The SCDDA requires companies to implement risk management processes and controls to identify and mitigate risks of forced labor and human trafficking in their supply chains. Firms must also disclose their policies and practices relating to due diligence on forced labor and human trafficking to the Federal Ministry for Economic Affairs and Energy (BMWi).
This new legislation places significant obligations on companies doing business in Germany, but the benefits are clear. Compliance with the SCDDA will help businesses ensure that their supply chains are free from slavery and human trafficking, protect their reputation, and maintain their competitive edge.
What Type of Businesses Does the Act Cover?
The Act applies to all companies that have a presence in Germany, regardless of the location of their headquarters, that employ 3,000 or more people. In 2024, the employment requirement will drop to 1,000 or more.
Businesses that have a local office in Germany, or that process, store or ship goods in Germany will be affected by the Act. If you’re unsure whether or not one of your suppliers is covered by the Act, contact your local German consulate for clarification.
What Human Rights Risks Does The Act Apply To?
The SCDDA defines a risk related to human rights as “a situation in which there is a sufficient degree of probability based on factual indications that a violation of one of the following prohibitions will occur”:
- Employing a child of 15 years or younger
- Child labor of children under 18 in accordance with the ILO Convention on Worst Forms of Child Labor, 1999 (No. 182)
- Forced labor
- All forms of slavery or similar practices of domination or oppression at work
- Disregarding the local applicable rules on workplace safety and working conditions if this could lead to workplace accidents or work-related health risks
- Disregarding freedom of association
- Employment discrimination
- Wage discrimination
- Causing harmful changes to the soil, polluting water, polluting air, causing harmful noise emission
- Acquiring, developing, or otherwise using land, forest, or water from unlawfully evicting persons from or depriving them of the use of such land, forest, or water
- Commissioning or using private or public security forces to protect a business project if, the security forces will infringe the prohibition on torture, harm life or limb, or interfere with freedom of association and the right to collective bargaining
- Actions or inactions that are directly capable of infringing a protected legal interest
What Environmental Risks Does The Act Apply To?
The SCDDA defines a risk related to the environment as “a situation in which there is a sufficient degree of probability based on factual indications that a violation of one of the following prohibitions will occur”:
- Manufacture of mercury-added products in accordance with article 4 of the Convention
- Use of mercury or mercury compounds in manufacturing processes in accordance with article 5 of the Convention after the phaseout date
- Handling of mercury waste contrary to the requirements of article 11 of the Convention
- Production and use of chemicals according to article 3
- Non-environmentally sound handling, collection, storage, and disposal of chemical waste contrary to the requirements of article 6 of the POPs Convention
- Export of hazardous wastes and other wastes according to article 1
- Export of hazardous wastes from states listed in annex VII of the Basel Convention to states not listed therein
- Import of hazardous wastes and other wastes from nonstate parties of the Convention
The Consequences of Non-Compliance
Complying with SCDDA statutes is of the utmost importance for organizations doing business in Germany. Compliance not only protects your company’s reputation, but also its bottom-line as penalties for non-compliance are steep.
- Fines: Monetary penalties of up to 8 million euros can be assessed depending on the nature and gravity of the violation. Companies with an average annual turnover of over 400 million euros can be fined up to 2% of their average annual turnover.
- Ban from public tenders: Perhaps an equally, if not more important consequence is that violating companies can be excluded from winning public contracts in Germany for up to three years.
Trade unions and NGOs can also be granted the authority to conduct litigation for an affected party.
Requirements for Responsible Sourcing in the Supply Chain
SCDDA requires companies to take a risk-based approach to responsible sourcing, and to enact adequate policies and procedures to mitigate the risks of slavery and human trafficking in their supply chains. Companies must also ensure that their suppliers comply with these policies and procedures.
Compliance with the SCDDA will require the following:
- Establishing a risk management system
- Defining where responsibility for compliance lies within the company
- Issuing a policy statement
- Performing regular risk analyses
- Establishing preventive measures within the company’s own field of business and in relation to any direct suppliers
- Taking remedial measures
- Establishing a complaints procedure
- Implementing due diligence obligations with respect to risks at indirect suppliers
- Documentation and reporting
If you’re operating in or supplying goods to Germany, it’s important to understand the requirements of the Act and make sure your business is compliant. SupplierGATEWAY has partnered with SupplyShift to bring you Sustainability Assessments that include a human rights assessment that is specifically informed by the SCDDA as well as other modern slavery laws enacted in California, France, UK, and Australia.
Benefits of Supply Chain Compliance
By adhering to the German Supply Chain Due Diligence Act, your company’s entire supply chain will be mitigating human trafficking and modern slavery. Ensuring your company’s due diligence also means your company has all proper documentation and protocol in place should any of your suppliers be in violation of the law. Your company will also avoid reputational damage while staying competitive in the marketplace.
In addition, compliance with the Act will provide your business with access to an array of sustainability-focused benefits. You’ll be able to access data on suppliers who are actively engaged in sustainable initiatives, which allows your company to source more sustainably.
Using SupplierGATEWAY’s Sustainability Assessments to score your suppliers on their sustainability initiatives can yield strategic insights about the supply chains of your suppliers. This will help you identify potential risk and take concrete steps towards risk mitigation.
4 Tips for Complying with The German SCDDA
If you’re looking to ensure maximum sustainability through your supply chain, here are 4 tips that will help you navigate the German SCDDA.
Implement a SCDDA-compliant risk management process. This needs to be tailored to your specific industry and suppliers, and include a thorough assessment of the risks posed by your suppliers and how to mitigate them. Assessing and monitoring your suppliers’ sustainability initiatives allows your company to identify and mitigate potential risk before damage occurs.
Work with your suppliers to get them compliant. Ensure that all compliance definitions are used consistently throughout any transaction and note that this may affect delivery times or manufacturing costs.
Use SCDDA-compatible processes for contract management. This ensures that evidence of compliance can be quickly stored and accessed during any auditing processes.
Familiarize yourself with best regulatory practices on an ongoing basis. In order to be compliant, you have to know the law. Make sure your company’s legal department is always on top of any changes in regulation pertaining to supply chain due diligence.
Tools to Streamline Supply Chain Compliance
When it comes to compliance, the key is to know where to start. Having reliable, accurate data on your suppliers is the first step not only towards SCDDA compliance, but to creating a more efficient and transparent supply chain for your company.
Our Sustainability Assessments score your suppliers on their sustainability initiatives by asking the right questions to get the answers you need. Your company can quickly identify gaps in your supply chain operations and steer conversations with suppliers in the right direction.
Having a supplier’s sustainability score allows you to set specific goals for each supplier and track their progress over time. This helps eliminate uncertainty regarding SCDDA compliance and ensures that each negotiation yields the best possible outcome for all involved parties.
Keeping supplier data centralized and accessible to those on your team who need it most ensures that supplier data is accurate and up to date. Capture supplier data up-front with streamlined onboarding instead of chasing down information when you’re already under pressure. Intuitively organize compliance documentation, and stop worrying about “what ifs”—you’ll already have them covered.
The German Supply Chain Due Diligence Act can be daunting for companies who are looking to maintain a sustainable supply chain. However, with the help of a supplier data management platform like SupplierGATEWAY’s, it is possible to navigate the Act, get compliant, and create a more sustainable supply chain for your company.