Faced with the continual flow of regulation produced by legislation all over the world, global companies must react effectively or face a deluge of financial and legal consequences. When new laws take effect, they assess current readiness, shore up resources and improve processes, and fortify their standing with documentation and ongoing compliance reporting. Strategic organizations also keep watch over the regulatory environment to anticipate the direction of future directives.
Case in point: The new German Supply Chain Due Diligence Act (or Lieferkettengesetz) has impacted all large companies doing business in Germany and their direct supply chains. These companies are currently assessing readiness with a lengthy questionnaire issued by the government and taking inventory of their existing supply chain risk management policies and processes. Forward-thinking businesses are also considering the broader context of SCDDA (or LkSG) – its purpose within the human rights campaign, its history, and its future.
The Focus on Supply Chain Human Rights
For decades, the global effort to promote human rights has been prompted by the atrocities witnessed in developing and authoritarian nations with few human rights protections. Frustrated by ineffectual social and political efforts to influence unresponsive countries, governments of developed nations have found market-based economic pressures to be an effective weapon. Legal jurisdictions target supply chains because they have long festered human rights abuses in labor communities without influence or protection, from human trafficking and child labor to dangerous working conditions and toxic exposure.
SCDDA’s Role in Promoting Human Rights in Business Enterprise
From 2000 to 2011, the OECD Guidelines for Multinational Enterprises published recommendations for business ethics, which included sections on human rights and environmental issues. In 2011, United Nations (UN) Guiding Principles on Business and Human Rights instituted the first global standard for preventing, addressing, and remedying human rights abuses in business activity. It specifies three-fold responsibility: States have the responsibility to protect human rights, enterprises have the responsibility to comply with human rights principles in business operations, and both have the responsibility to provide remedies to victims.
The UN Guiding Principles quickly impelled many nations to turn business enterprises’ non-binding responsibility into a legal obligation. France, the Netherlands, Norway, Switzerland, and the United Kingdom adopted supply chain acts, making due diligence and reporting mandatory for most of Europe. Australia adopted its Modern Slavery Acct in 2018, and Canada joined the effort in 2021 with its Senate Bill S-211. The United States has also enacted various laws to ensure human rights and environmental due diligence on a variety of issues, including a child and forced labor.
Germany’s SCDDA also aligns with the UN Guiding Principles and OECD Guidelines, but it is widely considered the most comprehensive and robust legislation to date. The SCDDA law:
- Requires companies to identify, prevent and mitigate risk in their supply chains; define authority and responsibility for compliance; implement effective grievance mechanisms; document and annually report their due diligence activities
- Imposes mandatory due diligence rules and penalties for non-compliance including large fines, exclusion from contracts, and exposure to civil liability
- Compels compliance throughout German company supply chains, mandating that companies identify issues among direct suppliers, and risk analyses for indirect suppliers where there is “substantiated knowledge” of human rights violations.
- Specifies a broad range of human rights abuses, including child labor, forced labor, slavery, safety and health violations, restrictions of association, unequal treatment, inadequate wage, unlawful eviction, and inappropriate use of security forces
- Expands the scope of human rights to related environmental conditions that impact occupational safety, such as the production and use of prohibited chemicals, unsound handling and storage of waste
The Future of Global Supply Chain Due Diligence
In the near future, the European Commission (EC) for a Corporate Sustainability Due Diligence Directive will mandate extensive due diligence obligations. In February 2022, the EC adopted the 2022 Draft EU Directive on Corporate Sustainability Due Diligence, which gives member States two years to enact the Directive as national law.
Similar to SCDDA, the EU Directive will require large EU companies and non-EU companies with business in the EU to identify and mitigate any adverse human rights and environmental impact of their activities. Corporate directors are obligated to integrate due diligence into company policies and victims are empowered to take legal action in response to damages. However, the EU version expands the scope of protections to business impacts on the environment, including environmental pollution and loss of biodiversity.
The trend toward global supply chain due diligence compliance is apparent: greater strength, scope, and reach. Companies should expect jurisdictions to impose harsher penalties for non-compliance and integrate other business abuses such as money laundering, corruption, and bribery into a comprehensive law. Predictions of international cooperation on a global scale may be realized in a few years.
Preparation for Impending Compliance Requirements
With all new legislation, companies will have to assess their readiness and thoroughly stress test their risk management systems for resilience. Supply chains will be under constant scrutiny for compliance with a range of human rights, environmental and ethical standards. Transparent documentation and reporting will require stringent data collection and analysis.Ethixbase360 can help prepare your company for the new era of due diligence with our comprehensive third-party risk management platform. Contact us for a demonstration of how it can work for your company.