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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, 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.
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:
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.
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.
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.
Compliance is determined by evaluating performance criteria across four core topics:
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.
Let's have a look at the overlaps and differences of the EU Taxonomy and the German Supply Chain Act and compare both.
These topics further include and incorporate the following:
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.
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.
Reach out today. We are more than happy to help.