How UK Companies Can Navigate the German Supply Due Diligence Act
Today’s post is written by KPMG. KPMG is a Coupa Global Elite Implementation partner and a proud Titanium sponsor for the Coupa Inspire 2023 events in Las Vegas and London.
A wave of new Environmental, Social, and Governance (ESG) regulations is impacting organizations around the world, with one, in particular, having big implications for UK organizations. The German Supply Chain Due Diligence Act — which took effect on January 1, 2023 — means UK companies not only need to meet the requirements but be ready to act on any human rights or environmental issues uncovered. Here we’ll address the details of the act and how UK companies can navigate the changes. And be sure to join me and my colleague Jon Hughes, Director of KMPG, at Inspire London, where we’ll discuss the challenges and opportunities of new ESG regulations.
Which companies are impacted
The German Supply Chain Due Diligence Act applies to organizations with over 3,000 employees in Germany, with this threshold expected to reduce to 1,000 employees on January 1, 2024. It applies regardless of sector, revenue, or location of the company’s headquarters. The act demands companies have a deep understanding of the human rights activities and environmental implications of their tier 1 (direct) suppliers. For tier 2 suppliers and beyond, it places companies under new, increased responsibility for violations. Non-compliance fines could be as much as 2% of the company’s global average turnover. Of course, reputational damage and trust erosion are further reaching impacts.
What challenges lie ahead in achieving compliance
Meeting the requirements of the German Act will take dedication and resources from companies – in particular, those with extensive global supply chains. It can be difficult for companies with thousands of suppliers to uncover issues beyond their first-tier suppliers, whether those issues are poor labor conditions, child labor, or damaging environmental practices. It will take dedicated resources to register all suppliers in the chain, reach out to them for insights, and remedy issues that are discovered. Some suppliers may be reluctant or unable to share data, either because they don’t have this data on their upstream supply chain, or due to commercial sensitivities. Companies will need to raise due diligence and show evidence they’re making efforts through ESG metrics, reporting, and prompt responses to breaches.
Why navigating the German Act now is so important
The German Act is one of a number that exists or is emerging in the corporate social responsibility space, including the UK’s Modern Slavery Bill and Green Claims Code, and the Norwegian Transparency Act. Importantly, the German act has also become a blueprint for the European Commission’s proposed Corporate Sustainability Due Diligence Directive (CSDDD). In a similar way to the German act, the CSDDD will require companies to understand, act on, and report on human rights issues and environmental performance across their supply chains.
The threshold for companies needing to comply with the CSDDD is predominantly financial. It captures non-EU companies that have profited more than €150 million in the EU in the previous financial year. It also includes non-EU companies that profit more than €40 million in the EU, provided at least 50% of worldwide profits are generated in a high-impact sector. Efforts made to comply with the German act will help companies to prepare for its strict requirements.
How to respond to the act
With significant work needed to meet the German Act requirements, here are five steps that can be taken to make the journey more manageable:
- Understand the material impact of the supply chain
The first step is to understand where the supply chain may have the highest concentration of issues when it comes to human rights violations or environmental damage. Companies need to understand those issues in their upstream supply chain and clearly understand where those risks occur.
- Prioritizing impact
With the material impact understood, consider where the most opportunity exists to make a positive change in human rights or environmental matters. This decision may be driven by where the business has leverage – perhaps due to the volume of orders, spend, or close relationships – or where the company has the best chance to influence change.
- Build relationships with suppliers
To uncover any issues in the supply chain, there is little substitute for personal engagement with suppliers, and seeing first-hand how they operate. Personal relationships can make a significant difference if issues are found that need to be resolved. Engaging the support of a local NGO, or leveraging work already done by supplier co-ops into problem product categories (such as soya or vanilla) can make this more manageable. Of course, in extensive supply chains, technology can also play a significant role in ‘knowing the suppliers’.
- Build clean databases
Data collection is key to knowing suppliers, understanding material impact, prioritizing activities, monitoring metrics, and reporting. Compliance becomes difficult to achieve and demonstrate if data is not complete, accurate, and well-managed.
- Be ready for reporting and scrutiny
The German Act expects organizations to continuously document the fulfillment of their due diligence obligations. Companies will also need to be ready for greater public scrutiny of their supply chain activities. With the CSDDD, there is potential for people impacted by human rights abuses or environmental breaches in the supply chain to take legal action against all companies in the chain. Demonstrating due diligence and acting on any issues discovered will be key to mitigating these potential risks.
Be ready for more regulations
While the German Act is currently in focus, UK companies will soon need to prepare for the EU’s CSDDD, so there is little time to waste. The important thing to remember is that the regulations are not asking for a ‘tick the box’ compliance exercise. Instead, they want organizations to deeply understand their suppliers and make a genuine, positive impact on human rights and the environment.
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