The German Supply Chain Act is just around the corner. It is set to become reality at the beginning of next year. All major companies will then be required to audit their suppliers worldwide.
The law was welcomed by human rights organizations, trade unions and Christian churches. Even if there is fundamental agreement that a regulation is necessary, there was some criticism on the other side, for example from employers' associations and companies. Above all, there were calls for Germany not to act alone, but for a pan-European initiative to be the only sensible way forward- if only for the sake of competition. A draft directive from the EU Commission is now available, but it is much stricter than the German law.
It also hits the medium-sized business
The European Commission is targeting smaller companies in particular. According to its ideas, companies with 500 employees or more should continuously monitor whether their suppliers violate the set standards. 500 employees - that probably means around 17.000 companies in the European Union. However, depending on the industry, this limit for the number of employees can also be pushed further down. For example, the 250-employee limit applies to the mining of mineral resources or the production of textiles. The EU justifies this with the higher risk of violations of environmental protection and human rights in these sensitive areas. The European Parliament states that it sees an improvement in the transnational draft:
"The Commission's draft goes much further than the German law. For example, a liability clause is to be included so that victims have easier access to the courts. That's a good thing, because to really have an effect, we need a supply chain law without loopholes."
The EU wants to introduce higher due diligence standards. Companies are to check where the primary products come from, whether there have been human rights violations in connection with slave labor or child employment, and finally check the consequences for the climate and the environment. This applies to all companies that are involved in the manufacturing process as suppliers.
The present German law, which comes into force on the 1st January 2023, already provides for systematic risk management and, in connection with this, electronic reporting to a federal authority. The information will be checked at least on a random basis and, in the event of suspicion, plausibility will be scrutinized. Basically, the regulations are an addition to already existing compliance requirements. The EU calms fears that the tightly meshed regulations will lead to high bureaucratic costs for companies with a figure of 0,009 percent of turnover, which it believes will be charged to large companies. At this point, however, the whole problem of European regulation becomes clear. Small and medium-sized companies have not had to worry about this so far, but with the reduction in the number of employees to more than 500, in some cases even 250, the cost and effort dimension becomes dicey for medium-sized companies as well.
Ethical standards lead the way
In principle, there is no doubt that the purchasing activities of German companies should be scrutinized with regard to human rights violations and environmental protection. The United Nations or the World Trade Organization WTO are also behind the demands for such monitoring. Germany ranks third in the world when it comes to imports and exports. In 2018, 775.000 companies imported in this country, generating sales of 1.1 trillion euros. A voluntary commitment from companies was not expected. When asked in 2019 what companies had done for fair trade, only 400 of the 3.000 companies asked responded at all, and of those, not even one in five had actually met the requirements. In view of Germany's close connection in the international context, i.e. regarding the import of raw materials as well as semi-finished goods, and also in connection with the wait-and-see behavior in the survey, a regulation is necessary in the international context. No one disputes this.
However, there is criticism, probably not without reason, of the individual regulations that are too far-reaching. On the one hand, this concerns the size of the company, since smaller companies face almost insurmountable obstacles when it comes to monitoring their suppliers. On the other hand, overly stringent regulations may require too much costly effort in terms of reporting and scheduling.
Supply chains are currently being discussed. The pandemic and some special factors have caused deliveries to be interrupted and manufacturing processes, for example in the automotive industry, to be paralyzed. Added to this are the price increases in purchasing, which have driven up inflation and significantly increased costs for the end user as well. In view of these problems, it is easy to understand why companies are reluctant to allow further hurdles to be erected that will accelerate the crisis in supply chain management.
Head of Economic Research