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Supply Chain Act in the SME sector: content and affected parties (1/2)
The Supply Chain Due Diligence Act (LkSG) passed by the German Bundestag has been in force since 2023 and entails severe penalties in the event of violations.
SMEs are also affected by the indirect reporting obligation and an even more far-reaching EU directive for all companies along the supply chain.
Not only is the name of the LkSG complex, but the exact content of the law and its implementation are also difficult to interpret for many affected mid-sized companies .
We are bringing light into the darkness with a two-part blog post series by SMEs for SMEs:
- Contents, affected parties and consequences of the LkSG
- Implementation of the law incl. LkSG checklist
Find out now in our two-part blog post series whether your company is affected, what requirements you will face and how you can implement the minimum requirements of the LkSG quickly and easily.
You will also receive a free LkSG checklist for use in your company with our final blog post.
Origin & Purpose
The Supply Chain Due Diligence Act (LkSG) is an effective law for Germany that is intended to contribute to environmental protection and the protection of human rights.
The law is based on the UN Guiding Principles on Business and Human Rights adopted by the UN Human Rights Council in 2011. These were taken up in Germany in 2016 with the National Action Plan for Business and Human Rights (NAP). The aim of the NAP was for at least 50% of German companies with more than 500 employees to voluntarily fulfill certain due diligence obligations by the end of 2020. However, subsequent monitoring revealed that this voluntary commitment was unfortunately not sufficient and only around 13-17% of the sample of 7,400 companies met the requirements. The failure to meet the target consequently resulted in the need for statutory regulation - the Supply Chain Due Diligence Act, which has been in force since January 1, 2023.
The legal framework is intended to ensure that companies based in Germany source their goods from suppliers who attach importance to good working conditions and environmental protection.
Contents of the LkSG
Risk fields
In order to protect people and the environment, the LkSG describes a human rights risk (Section 2 (2)) and an environmental risk (Section 2 (3)), the avoidance of which has the highest priority. The risk areas include, among others:
Human rights
Child labor, forced labor and slavery, violation of occupational health & safety regulations, violation of freedom of association, discrimination, remuneration according to minimum wage, unlawful expropriation
Environmental
Production and use of mercury, use/production of harmful chemicals, disposal and handling of (harmful) waste
Regulations
With the aim of identifying and eliminating risks, the LkSG stipulates various duties of care in its Section 3 (1) sentence 2:
- Establishment of risk management (section 4 (1))
- Definition of internal company responsibility (Section 4 (3))
- Carrying out regular risk analyses (§ 5)
- Submission of a declaration of principles (Section 6 (2))
- Establishment of preventive measures in the company's own business area (Article 6 (1) and (3)) and vis-à-vis direct suppliers (Article 6 (4)) and vis-à-vis direct suppliers (Article 6 (4))
- Taking remedial measures (Section 7 (1) to (3))
- Establishment of a complaints procedure (§ 8)
- Implementation of due diligence obligations with regard to risks at indirect suppliers (§ 9)
- Documentation (Section 10 (1)) and reporting (Section 10 (2))
Medium-sized companies are also affected by the LkSG
The LkSG affects everyone - not only larger companies, but also medium-sized companies are affected by the indirect reporting obligation and a possible new EU directive.
Who exactly is affected by the LkSG?
The Supply Chain Act has applied to companies with more than 3,000 employees since January 1, 2023 and to companies with more than 1,000 employees from 2024.
How is the industrial SME sector affected?
On June 1, 2023, the EU Parliament voted in favor of a more far-reaching directive at EU level, in which mid-sized companies with more than 250 employees and a turnover of €40 million are also affected by supply chain due diligence obligations. This summer, the trilogy negotiations between the EU Council, EU Commission and EU Parliament will begin.
Companies must check all direct suppliers for compliance with minimum social and environmental standards from this point onwards at the latest. Companies that procure intermediate goods or finished products abroad must take responsibility for production processes and working conditions at their suppliers, trace abuses and avoid or remedy them from the outset or as soon as they become known.
As a result of the indirect reporting obligation along the supply chain and the increased requirements of customers on their suppliers, the backbone of the German economy - industrial SMEs - is also affected and must position itself for the future in order to remain competitive as a supplier. Failure to comply with this legal obligation may result in a fine or compensation from competitors.
Consequencesof violation
Civil law
A violation of the LkSG does not result in any civil penalties (Section 3 (3)).
Penalties from the LkSG
Violations of the provisions of the LkSG may result in a penalty payment of up to €50,000 (Section 23) and fines depending on the size and turnover of the company (Section 22 (2), Section 24).
Exclusion from public tenders for up to three years may also be a consequence (§ 22).
You can find all the facts, figures and data on the LkSG in our compact white paper
Learn now in our white paper what obligations the LkSG contains, whether you are affected by it and how you can easily and intuitively control the LkSG within your supply chain and comply with the minimum requirements with the help of Tacto.
SMEs are also affected by the indirect reporting obligation and an even more far-reaching EU directive for all companies along the supply chain.
