LkSG + ESRS = A Perfect Match (Save Time And Resources)

In one of our last articles, we talked about the overlap between the EU Taxonomy and the LkSG. In this one, we want to inform you about the connection between the LkSG (German Supply Chain Law / Lieferkettensorgfaltspflichtengesetz) and the European Sustainability Reporting Standards (ESRS). That way, you can save valuable time and resources. Let’s dive right in!

What is the LkSG (German Supply Chain Law)?

The German Supply Chain Act, also known as LkSG, is a law aimed at improving supply chain management and protecting human rights. The law applies to Germany companies with more than 3,000 employees in 2023 and more than 1,000 employees as of 2024 and requires them to ensure their supply chains are free from human rights violations. 

The law provides a framework for companies to identify and address risks in their supply chains and ensure that their operations are conducted in a responsible and sustainable manner.

Key Provisions of the German Supply Chain Act

The German Supply Chain Act requires companies to implement due diligence measures to identify and address any human rights violations or environmental damage that may occur in their supply chains. This includes conducting risk assessments, establishing a complaints mechanism, and implementing remediation measures where necessary. The law also requires companies to publish an annual report detailing their due diligence measures and the results of their risk assessments.

What are the Due Diligence Requirements under the German Supply Chain Act?

The due diligence requirements under the German Supply Chain Act are designed to help companies identify and address risks in their supply chains. These requirements include conducting regular risk assessments to identify and prioritize human rights and environmental risks in their supply chains, taking appropriate preventive measures to prevent human rights abuses and environmental damage, implementing remediation plans, compensation for affected parties, and termination of business relationships, and establishing a complaints mechanism to enable workers and other stakeholders to report human rights abuses and environmental damage in their supply chains.

How Can Companies Comply with the German Supply Chain Act?

To comply with the German Supply Chain Act, companies must take a proactive approach to identifying and addressing risks in their supply chains. This includes conducting a comprehensive risk assessment to identify and prioritize human rights and environmental risks in their supply chains, establishing appropriate preventive and remediation measures, and setting up a complaints mechanism that is accessible, independent, and effective. By complying with the law, companies can not only protect themselves from reputational damage and legal liability, but also contribute to the well-being of workers and the environment.

Transition to and comparison with the ESRS

There are many similarities and overlaps between the LkSG and the ESRS that we would like to explain in more detail in the following.

Materiality assessment of the ESRS

The ESRS require companies to disclose their material impacts, risks, and opportunities related to their own workforce (e.g. Disclosure Requirement S1-3). This is very much related to the risk assessment that German companies have to conduct for the LkSG.

In general, an impact and financial materiality assessment is a process that companies use to identify and prioritize the most significant impacts, risks, and opportunities related to their operations. This assessment typically involves analyzing the potential social, environmental, and economic impacts of a company's activities on its stakeholders, as well as the financial implications of these impacts.

To conduct an impact and financial materiality assessment related to a company's own workforce, some factors that could be considered include:

- The number of employees affected by a particular issue

- The severity of the issue (e.g., whether it poses a risk to employee health or safety)

- The potential costs associated with addressing the issue (e.g., implementing new policies or procedures)

- The potential benefits of addressing the issue (e.g., improved employee morale or productivity)

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Overall, the goal of an impact and financial materiality assessment is to help companies prioritize their efforts to address the most significant issues related to their own workforce.

LkSG And ESRS Comparison

Here is a detailed overview and comparison between the LkSG and the ESRS requirements:

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LkSG 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

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ESRS Requirements ((ESRS S1) Own workforce; (ESRS S2) Workers in the value chain; (ESRS S3) Affected communities; (ESRS S4) Consumers and end-users):

• Disclosure Requirement S1-1: Companies must disclose their policies related to their own workforce, including policies on diversity and inclusion, equal opportunities, and employee well-being.
• Disclosure Requirement S1-2: Companies must disclose their processes for engaging with their own workers and workers' representatives about impacts. This includes processes for consultation, communication, and feedback mechanisms.
• Disclosure Requirement S1-3: Companies must disclose their processes to remediate negative impacts and channels for own workers to raise concerns. This includes grievance mechanisms, remediation plans, and follow-up actions.
• Disclosure Requirement S1-4: Companies must disclose health and safety indicators related to their own workforce. This includes data on occupational health and safety incidents, lost time injury rates, and near-miss reporting.
• Disclosure Requirement S2-1 requires companies to disclose their policies related to value chain workers, including any policies related to human rights, labor standards, and working conditions.
• Disclosure Requirement S2-2 requires companies to disclose their processes for engaging with value chain workers about impacts, risks, and opportunities related to their work. This includes information on how companies identify and prioritize stakeholders for engagement, as well as how they communicate with them.
• Disclosure Requirement S2-3 requires companies to disclose their material impacts on value chain workers, as well as any risks and opportunities related to these impacts. Companies must also describe how these impacts are integrated into their strategy and business model.
• Disclosure Requirement S2-4 requires companies to disclose their approaches to taking action on material impacts on value chain workers, as well as their effectiveness in mitigating risks and pursuing opportunities related to these impacts.

[similar Disclosure Requirements exist in ESRS S3 and ESRS S4 for affected communities and consumers / end-users]

LkSG and ESRS Overlaps

The LkSG and ESRS regulations overlap in the following areas:

1. Risk assessment and identification:
   Both LkSG and ESRS require companies to assess and identify risks in their supply chains. LkSG specifically focuses on human rights and environmental risks (From raw material extraction to the delivery to end consumer with a focus on upstream supply chain), while ESRS addresses a broader scope of risks, including those related to their own workforce (ESRS S1), workers in the value chain (ESRS S2), affected communities (ESRS S3), and consumers and end-users (ESRS S4).
2. Engagement with stakeholders:
   Both regulations emphasize the importance of engaging with stakeholders. LkSG requires companies to establish a complaints mechanism for human rights abuses and environmental damage in their supply chains, while ESRS requires companies to disclose their processes for engaging with various stakeholders, such as their own workers, workers in the value chain, affected communities, and consumers and end-users.
3. Remediation measures:
   The LkSG as well as the ESRS require companies to establish remediation measures to address negative impacts. LkSG focuses on remediation measures for human rights abuses and environmental damage, including remediation plans, compensation, and termination of business relationships. ESRS similarly requires companies to disclose their processes to remediate negative impacts and channels for stakeholders to raise concerns, including grievance mechanisms, remediation plans, and follow-up actions.
4. Supplier and value chain worker policies:
   LkSG requires companies to establish preventive measures, such as setting standards for suppliers (Supplier Code of Conduct). ESRS also requires companies to disclose their policies related to value chain workers (Disclosure Requirement S2-1), which may include similar standards and expectations for human rights, labor standards, and working conditions.
5. Monitoring and disclosure:
   Both LkSG and ESRS emphasize the importance of monitoring and disclosing relevant information. LkSG requires companies to establish preventive measures like training suppliers and employees and conducting audits. In contrast, ESRS focuses on disclosure requirements across various stakeholder groups, such as policies, engagement processes, material impacts, and actions taken to address these impacts.

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In summary, LkSG and ESRS overlap in the areas of risk assessment, stakeholder engagement, remediation measures, supplier and value chain worker policies, and monitoring and disclosure. Although they have slightly different specific requirements, both regulations aim to ensure responsible and sustainable business practices that consider human rights, environmental, and social aspects and there is a lot of potential to save time, energy and costs by combining the two regulations.

How Daato Can Help You

Daato can help companies to comply with the due diligence requirements of the LkSG by offering a compliance tool to manage supply chain ESG performance in one place. 

It can also help companies comply with reporting requirements of the ESRS and other sustainability reporting standards by consolidating all ESG data on one platform and automatically transferring the data companies used for instance for the LkSG. Wherever there is an overlap of information between different frameworks and regulations, Daato automatically fills it in so you save time and valuable resources.

Additionally, Daato can help companies identify and manage ESG risks and opportunities, including those related to taxation, free competition, anti-bribery, and anti-corruption.

By providing a comprehensive software solution, Daato can help companies future-proof their ESG reporting and management, stay ahead of emerging regulatory requirements, and promote sustainable business practices. 

If you're interested in learning more about how Daato can assist you with your sustainability efforts, don't hesitate to contact us.