2023 is a whole new year that brings with it new ambitions, challenges, and this 10-syllable German word which you may have heard of before in European corporate discussions. The Lieferkettensorgfaltspflichtengesetz, or LkSG for short, is the German Act on Corporate Due Diligence Obligations in Supply Chains. The introduction of the LkSG marks the first time that the responsibility of respecting human rights in global supply chains has been put on the legal shoulders of German enterprises and has the potential to influence similar legislation in other jurisdictions around the globe. In fact, the European Commission has adopted a similar proposal called the Directive on Corporate Sustainability Due Diligence which aims to foster sustainable and responsible corporate behaviour throughout global value chains.
Taking effect on January 1, 2023, the LkSG is a likely anchor for corporate new year’s resolutions. Read this 5-minute article below for a quick and easy English overview that covers the basics of what you need to know.
To whom does the LkSG apply to?
The LkSG applies starting January 1, 2023 to companies in Germany with at least 3,000 employees. For purposes of the Act, temporary workers are also counted as employees, provided they are employed for more than 6 months. It should be noted that the Act applies to any enterprise, regardless of its legal form and regardless of the sector or industry in which it operates. This includes foreign companies as well, on the condition that the company has a branch operating in Germany with at least 3,000 employees.
Starting January 1, 2024, the threshold will be lowered to companies in Germany with at least 1,000 employees.
What are a company’s due diligence obligations?
In simple terms, the LkSG requires that companies subject to its provisions respect human rights within their supply chains by implementing the following due diligence obligations:
There are eleven internationally recognised human rights conventions on which the LkSG requirements for corporate action are meant to protect. These include, in particular, the prohibition of child labour, slavery and forced labour, the disregard of occupational safety and health obligations, withholding an adequate wage, the disregard of the right to form trade unions or employee representation bodies, the denial of access to food and water as well as the unlawful taking of land and livelihoods.
What are the penalties for companies that do not comply with the LkSG?
If a corporation fails to comply with its legal obligations, monetary fines can be imposed. This fine can amount to up to 8 Million Euros or, for those companies with an annual turnover of more than 400 Million euros, a fine of 2% of the company’s annual global turnover could be charged. In select cases, companies can even be excluded from the participation in public procurement contracts.
Who enforces the LkSG?
Germany’s Federal Office for Economic Affairs and Export Control (or the Bundesamt für Wirtschaft und Ausfuhrkontrolle aka BAFA) handles the responsibility of implementing the LkSG and monitoring whether the companies concerned are sufficiently meeting their due diligence obligations. Equipped with their supervisory powers, the BAFA would be able to enter business premises, demand information, and inspect documents.
What other resources are available to help companies meet their LkSG obligations?
In order to support companies in implementing their due diligence obligations, BAFA develops and publishes guidance on a regular basis. Here is their published guide on conducting a risk analysis as required by the German Supply Chain Due Diligence Act ‘Lieferkettensorgfaltspflichtengesetz’ or ‘LkSG’
The German Federal ministry of Labour and Social Affairs also features a specific page on their website with reliable information on the Supply Chain act including background and development, implementation, and FAQs.
Interested in supply chain strategy? Social procurement is a proactive way for corporations to go beyond the bare minimum of upholding human rights standards in the supply chain and into social value creation. Learn more about this growing global movement here.
Article written by Jo Bautista
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