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Lieferkettengesetz, or the Supply Chain Act, is a German law that requires companies to act against human rights and environmental exploitations in their supply chain, all through the entire upstream and downstream value chain. It will come into force on 1st of January 2023 and will first be rolled out to companies based in Germany with more than 3,000 employees. That means that in addition to German-incorporated companies, the law also applies to foreign companies with branches in Germany. From 2024 onwards, that employee threshold will be reduced to 1,000.
In terms of significance, companies in violation could face fines of up to 2% of their annual company revenue and a temporary ban from public contracts. The Act transfers the burden of responsibility from international suppliers - over whom this law has no jurisdiction - to the contracting German company, thus transcending geographic boundaries through legislative design. Its influence therefore extends to any country or company that is a part of the supply chain of the applicable companies, by way of holding German businesses accountable for their engagement with foreign suppliers.
In its provisions, Lieferkettengesetz references 13 international treaties. Companies in jurisdictions that have ratified and enforced those treaties should pose a lower risk to compliance, assuming they are actually implemented. The challenge is in investigating the level of compliance with treaty provisions and dealing with suppliers in non-signatory countries where motivation to comply will require more than a legal heavy hand.
The extensive scale and diversity of global supply chains add layers to the ESG risk identification and management process. Risk assessments will need to be conducted for each and every supplier based on country and company profile. This can look extremely different from supplier to supplier, ranging from palm oil production in Indonesia to the migrant worker issue in Malaysia to military-related sanctions in Myanmar. Companies often are not aware of the hidden risks in their supply chain so due diligence will be a demanding undertaking.
The other challenge presented by the Supply Chain Act is reporting. Transparent reporting is needed to demonstrate compliance with the Act. Awareness of the various ESG risks is vital for companies to manage a responsible supply chain. When dealing with a sprawling network in different countries and industries involved, it can be extremely helpful to have a system for tracking and monitoring supply chain risks with the capacity to handle large amounts of data as well as to screen against reporting criteria. Reporting software makes it easy to engage with suppliers, get the right information, and assess ESG performance and reporting compliance.
Sometimes, companies use different systems or spreadsheets for managing their many tiers of suppliers and ESG risks. A manual approach is simply unsustainable for capturing dynamic information that could change and create a butterfly effect across the rest of the chain. Even traditional ERP systems were not designed to map supply chains. This is where dedicated new technologies like Daato come in which can be integrated with existing systems.