German Supply Chain Act (LkSG) & EU Taxonomy - A Shortcut to Compliance and Framework Combination

Supply chains are like the backbone of businesses today. They bring together all the different things needed to make products or offer services.

In our interconnected world, how well a business does often depends on how well its supply chain works. Supply chains can be complicated, with lots of steps and people involved in getting things to customers on time and at the right cost.

But there's a big challenge and also a big opportunity for businesses when it comes to supply chains. There are new rules about making supply chains sustainable, such the German Supply Chain Act (LkSG) and the Minimum Safeguards assessment of the EU Taxonomy. These rules are all about making sure that businesses meet certain sustainability standards in their supply chains.

In this article, we’ll give you an overview of these two major sustainability regulations and how they overlap, so you can prepare your company for compliance as best as possible and save precious time knowing how they are connected.

The German Supply Chain Act (LkSG): Improving Supply Chain Management

The German Supply Chain Act, or LkSG, is a piece of legislation that aims to improve supply chain management and protect human rights. The law requires companies with more than 3,000 employees (1,000 as of 2024) to ensure that their supply chains are free from human rights violations, environmental damage, and other negative impacts. The LkSG applies to companies based in Germany, as well as companies that operate in Germany, regardless of where they are based.

How Can Companies Comply With The German Supply Chain Act?

Complying with the German Supply Chain Act requires companies to take a proactive approach to identifying and addressing risks in their supply chains. Here are the steps that companies can take to comply with the law:

• Conduct a risk assessment: Companies should conduct a comprehensive risk assessment to identify and prioritize human rights and environmental risks in their supply chains.
• Establish preventive measures: Based on the results of the risk assessment, companies should establish appropriate preventive measures to address the identified risks. This may include setting standards for suppliers, training suppliers and employees, and conducting audits.
• Establish remediation measures: Companies should establish appropriate remediation measures to address any human rights abuses or environmental damage that is identified in their supply chains. This may include remediation plans, compensation for affected parties, and termination of business relationships.
• Establish a complaints mechanism: Companies should establish a complaints mechanism to enable workers and other stakeholders to report human rights abuses and environmental damage in their supply chains. The complaints mechanism should be accessible, independent, and effective.

Challenges in Implementing The German Supply Chain Act

While the German Supply Chain Act is a positive development, it also poses some challenges for companies. For example, implementing the due diligence measures required by the law can be complex and time-consuming, particularly for companies with large and complex supply chains. Additionally, the law may result in increased costs for companies, as they may need to invest in additional resources to ensure compliance.

Introducing: Your Solution

If you fall under the EU Taxonomy already, you might save yourself some work on the LkSG, so read on. We explain everything in more detail.

The EU Taxonomy is a vital tool for achieving the EU’s ambitious climate and environmental goals. It aims to foster sustainable investments and provide clear criteria for identifying environmentally sustainable economic activities. The EU Taxonomy's Minimum Safeguards play a critical role in ensuring that.

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What Are The Minimum Safeguards of The EU Taxonomy And Why Are They Important?

The Minimum Safeguards, an integral part of the EU Taxonomy Regulation, are based on recommendations from the European Parliament and the Technical Expert Group. They aim to ensure that investments or activities labeled as "Taxonomy-aligned" meet minimum governance standards and do not violate social norms, including human rights and labor rights. In essence, they serve as a safety net to prevent green investments from being deemed "sustainable" if they violate human or labor rights or engage in corrupt, anti-competitive, or non-compliant taxation practices.

The Specific Requirements of The Minimum Safeguards And How to Assess Compliance With Minimum Safeguards

Compliance is determined by evaluating performance criteria across four core topics:

• Human rights, including workers' rights
• Bribery/corruption
• Taxation
• Fair competition

The Minimum Safeguards criteria are anchored in guidance from competent international bodies and upcoming EU regulations (CSDDD, CSRD, SFDR), but they do not supersede more stringent requirements in EU law. Environmentally sustainable economic activities must also meet responsible business conduct criteria outlined in various international guidelines.

Overlaps and Differences of the EU Taxonomy and the LkSG

Let's have a look at the overlaps and differences of the EU Taxonomy and the German Supply Chain Act and compare both.

German Supply Chain Act Requirements

• Conduct a risk assessment to identify and prioritize human rights and environmental risks in their supply chains.
• Establish preventive measures to address the identified risks. This may include setting standards for suppliers (Supplier Code of Conduct), training suppliers and employees, and conducting audits.
• Establish remediation measures to address any human rights abuses or environmental damage that is identified in their supply chains. This may include remediation plans, compensation for affected parties, and termination of business relationships.
• Establish a complaints mechanism for human rights abuses and environmental damage in their supply chains

EU Taxonomy Minimum Safeguards Requirements

• Human rights (including labor and consumer rights)
• Anti-bribery and anti-corruption;
• Taxation; and
• Free competition

These topics further include and incorporate the following:

• UN Guiding Principles on Business and Human Rights
• OECD Guidelines for Multinational Enterprises (2011)
• Policies such as a public Human rights policy / code of conduct
• Due Diligence and Risk Assessment: document on the organization's human rights and environmental DD process or the results of the latest DD procedures
• Governance: an org chart that provides information on the division within the organization of responsibilities regarding human rights impact mitigation.
• Reporting: most recent human rights reporting (e.g. standalone report, integrated annual report, or website page), which must be freely accessible online
• Grievance Mechanism: a document describing the organization's grievance mechanism and a link to a web page and/or phone numbers that are available to aggrieved parties for filing their grievances.
• Anti-Corruption: Commitments to refrain from providing and requesting undue advantages as well as using third parties for channeling undue advantages to public officials in the form of an Anti-Corruption and Bribery Policy, code of conduct, or a similar document.
• Free competition: Public statement that the company follows all laws and regulations in the jurisdictions in which it is active (e.g. In its annual report, compliance report).
• Taxation: The organization publicly commits itself to be compliant with all tax regulations in all jurisdictions in which it operates + link to the document

The EU Taxonomy Minimum Safeguards and the LkSG have some similarities when it comes to dealing with human rights issues and evaluating risks. However, the EU Taxonomy Minimum Safeguards cover additional topics like anti-bribery and anti-corruption, fair competition, and taxation. These topics are not explicitly mentioned in the German Supply Chain Act.

In terms of requirements for supply chain management, both the EU Taxonomy Minimum Safeguards and the LkSG require companies to establish preventive measures to address identified risks, remediation measures to address any abuses or damage, and a complaints mechanism.

Both the EU Taxonomy Minimum Safeguards and the German Supply Chain Act also refer to established frameworks such as the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises. These frameworks are important guidelines for companies to consider. When it comes to reporting, both regulations require companies to share information about their processes for ensuring human rights and environmental responsibility. They should also make their grievance mechanisms accessible to the public.

‍Conclusion

The German Supply Chain Act is an important piece of legislation that seeks to improve supply chain management and protect human rights. By requiring companies to take an active role in ensuring that their supply chains are free from human rights violations and environmental damage, the law is expected to have a positive impact on communities, workers, and the environment. However, it also poses challenges for companies, particularly in terms of implementing the required due diligence measures. 

The EU Taxonomy Minimum Safeguards and the LkSG share some similarities as outlined above which can help you to fulfill the LkSG more easily. Overall, the German Supply Chain Act as well as the Minimum Safeguards of the EU Taxonomy represent a significant step forward in the ongoing effort to promote ethical and sustainable supply chain management.

How Daato Can Help You

• Daato offers a comprehensive software solution for sustainable organizations that can help companies future-proof their ESG reporting and management. The software provides a one-stop-shop for all ESG-related requirements, from compliance to action.
• In terms of supply chain sustainability, Daato provides a compliant tool to manage supply chain ESG performance in one place. This can help companies comply with the due diligence requirements of the German Supply Chain Act, including conducting risk assessments, establishing preventive measures, remediation measures, and a complaints mechanism.
• Daato also brings all ESG data together on one platform, allowing companies to report on legal and voluntary frameworks in a more efficient and streamlined manner. This reporting functionality can help companies comply with the reporting requirements of the EU Taxonomy and other sustainability reporting standards.
• Finally, Daato can help companies identify and manage ESG risks and opportunities in the financial system, including those related to taxation, free competition, anti-bribery, and anti-corruption. By providing a centralized platform for managing and reporting on sustainability data, Daato can help companies stay ahead of emerging regulatory requirements and stakeholder expectations, while also driving innovation and promoting more sustainable business practices.