LKSG directive – German companies verify supply chains

Anna Kolinczat, Procurement Excellence Manager

31th August 2023
Knowledge base
3 min

Companies Responsibility for Supply Chains: The Challenge of Modern Business

In today’s global economic landscape, businesses are tightly conected by a network of supply chains that form the invisible backbone of the world economy. These vast supply networks, which span the globe, allow companies to deliver products and services to every corner of the world. However, as these supply chains become more extensive and global, there is a growing need to manage them responsibly. Companies’ responsibility for supply chains is a key topic today. Events related to business practices that affect human rights, communities and the environment are attracting the attention of the public, investors and regulators. Companies now need to not only provide competitive products and services, but also take action in a way that is socially ethical and sustainable. That’s why Germany will launch a new directive about due diligence in supply chains.

Germany’s Landmark LKSG Directive: Strengthening Supply Chain Responsibility and Protecting Human Rights Across Borders

EU Supply Chain Due Diligence Directive (Lieferkettensorgfaltspflichtengesetz or LKSG) is a new law passed by the German government to promote responsible business practices and protect human rights in global supply chains. The LKSG applies to German-based companies with more than 3,000 employees starting in 2023 and companies with more than 1,000 employees starting in 2024.
The main goal of the LKSG is to ensure that companies’ responsibilities for the entire supply chain, including their suppliers and subcontractors. Companies are required to establish and implement a due diligence system that includes risk assessment, preventive actions, risk management, and monitoring and reporting on their efforts to mitigate these risks. These companies are also responsible for damages caused by their suppliers.

LKSG: Balancing Accountability and Challenges in Global Supply Chain Responsibility

The Supply Chain Due Diligence Directive (LKSG) covers a range of issues, including child labor, forced labor, modern slavery, discrimination, health and safety, environmental protection and corruption. The LKSG also provides for civil liability and penalties for non-compliance, and allows NGOs and trade unionists to take legal action on behalf of aggrieved parties. Companies responsibility from selected suppliers is key in this directive. The LKSG has been accepted by human rights organizations and civil society, who see it as a significant step toward holding companies accountable for their actions in global supply chains. However, some business groups have expressed concerns about the practical implementation of the law, the cost and complexity of due diligence requirements, and the risk of unfair competition from non-compliant companies.

SAP Ariba: Streamlining Compliance with Germany’s LKSG Through Supplier Management Solutions

Tools such as SAP Ariba address the challenges companies face with the German directive by providing a centralized platform for managing supplier information, conducting assessments and monitoring supplier compliance. Companies can automate their purchasing processes, including supplier selection and management, contract negotiation and management, and order processing. This can help ensure that a company only works with suppliers that meet LKSG and other regulations.

Magdalena Woźniak

Attorney at law

Lawyer’s opinion:

Although the LKSG law applies in Germany, the restrictions and obligations it contains also affect the Polish market. Namely, if a domestic entrepreneur cooperates with a German counterparty obliged to apply the LKSG, the German partner may demand detailed information about its Polish supplier and, importantly, its subcontractors operating both in Poland and abroad.

Obligations may also be imposed on the Polish entrepreneur, intended to protect the German party – for example, he may be required to:

fill out detailed questionnaires on issues of human rights protection, labor rights and environmental protection,
to include in the content of the contract appropriate statements on compliance with LKSG assumptions,
conduct staff training related to the assumptions of the German law,
take into account the criteria indicated in the LKSG when selecting its contractors,
implement a procedure for reporting violations of the LKSG,
apply corrective measures in the event of violations.

As the sanctions imposed by the LKSG may be substantial (a penalty of up to €800,000 or up to 2% of turnover in the case of legal entities or partnerships with an annual turnover of €400 million or more), it can be expected that German companies obliged to apply the new law will take steps to ensure their compliance with the new regulations, which may increase the obligations of their Polish counterparts as well.

Summary

Investing in technologies that enable full transparency can prove crucial to building trust and effective supply chain management.

After all, the companies that are responsible for its supply chains not only meets its legal obligations, but also contributes to creating a better world where business does not conflict with human rights and environmental interests. This approach not only pays off today, but is also vital to the future of business and the planet.