Dr. Andreas Kannt, Head of Strategy Supply Chain Management, Fraunhofer-Gesellschaft; Ass. jur. Sophia Heckmann, Legal Strategy Officer, Fraunhofer-Gesellschaft
On January 1, 2023, the German Corporate Due Diligence Act for the Prevention of Human Rights Violations in Supply Chains – “LkSG” or Supply Chain Act for short - came into force. The German federal law governs the economic activities of companies based in Germany with more than 1,000 employees by imposing due diligence obligations to minimize human rights and environmental risks in their supply chains.
The law has far-reaching implications for how German companies organize their supply chains. Germany is thus taking on a trailblazer role within the European Union. The adoption of a supply chain act - the Corporate Sustainability Due Diligence Directive (CSDDD) - is also imminent at European level.
Even before the German Supply Chain Act came into force, the Fraunhofer-Gesellschaft, which is based in Germany, had already dealt intensively with the due diligence obligations, and adapted its purchasing processes to the new requirements. As the world's leading organization for applied research, the Fraunhofer-Gesellschaft plays a significant role in the innovation process of the global economy. Fraunhofer Corporate Purchasing is responsible for the purchasing activities of the 76 institutes and headquarters with an annual purchasing volume of 1 billion euros and procures via its own tender portal. In view of the high volume of contracts awarded, the dynamic and complex requirements and the heterogeneous supplier base, the demand for a structured approach is increasing to adequately fulfill the due diligence obligations of the Supply Chain Act.
How do the requirements of the Supply Chain Act affect Japanese companies?
German companies must ensure that human rights and environmental risks are minimized along their supply chains. In order to fulfill this obligation, they need to cooperate with their national and especially international suppliers. Since the introduction of the Supply Chain Act, German companies have placed ever greater emphasis on social and environmental criteria when selecting their suppliers. A good performance in these areas can be decisive for Japanese companies when it comes to winning future orders from German customers.
To better prepare for these requirements, Japanese companies should familiarize themselves with the provisions of the German Supply Chain Act. This includes understanding the specific obligations and expectations placed on companies operating in Germany. A comprehensive risk analysis of their supply chains, particularly in relation to the areas of protection set out in the German Supply Chain Act, is also crucial. Japanese companies should clearly position themselves in favor of human rights protection and take proactive steps to ensure that their suppliers also follow these principles. In the event of violations, corrective action should be taken immediately to address the issues and prevent recurrence.
International standards, such as the Sustainable Development Goals of the United Nations, the ILO core labour standards and internationally recognized certificates can also provide assistance in the further development of a company's own business activities and make Japanese suppliers more attractive to German customers. Registration on an ESG rating platform may also be advisable, as many German companies already check the ratings of their suppliers on these portals.
Overall, the German Supply Chain Act presents both challenges and opportunities for Japanese companies supplying goods and services to Germany. By implementing these requirements, Japanese companies can strengthen their reputation, improve their relationships with German customers and help promote responsible business practices around the globe.