The past decade has seen an increase, globally, in the scrutinisation of corporate supply chains, specifically those involving material sourcing and labor practices. The passing of the German Supply Chain Act in June 2021 is one milestone step in response to public outcry for companies to better monitor and remediate human rights and environmental risks in their supply chains. At a practical level, however, providing such transparency, maintaining efficiency and operationalizing new regulatory requirements will be challenging for many organizations. As new supply chain reporting practices and obligations scale up, blockchain technology offers a promising solution to facilitate and automate transparency, security and enhanced communication with regulatory bodies and partners.

Understanding the SCDDA

The SCDDA applies to all companies with a registered office or subsidiary in Germany and at least 3,000 employees. By 2024, this scope will expand to include companies with over 1,000 employees. Failure to comply with due diligence and reporting obligations can result in fines up to €8 million, alongside potential reputational damage and exclusion from public contracts for up to three years.

The German Supply Chain Due Diligence Act applies due diligence obligations on enterprises that have their central administration, principal place of business, administrative headquarters, statutory seat or branch office in Germany to comply with environmental and human rights standards in their supply chains.

The SCDDA introduces a comprehensive list of obligations, which includes the development of a risk management system for compliance. It also details the requisite preventive and remedial measures and makes mandatory complaint procedures. The law requires regular documentation and reporting, and violations are subject to major fines.

Where to Start?

Despite the imminent rollout of the SCDDA, a significant number of companies are uncertain about compliance procedures. A recent survey reveals that 18 out of 20 of the largest German companies lack evidence of managing human rights risks, hindering their ability to fulfill due diligence obligations.

Building a Transparent and Compliant Supply Chain

Achieving SCDDA compliance requires a proactive approach to supply-chain analysis, risk identification, and management. Collaboration with direct and indirect suppliers is crucial for implementing effective due diligence measures and documenting them throughout the supply chain. Many companies are investing in governance and compliance management capacities, leveraging technology for data collection on suppliers' environmental and social practices.

Essential Capabilities for Compliance

To ensure compliance with the SCDDA, businesses should seek supply-chain risk management software with the following seven essential capabilities:

  • Integrate Master Data: Streamline data by integrating financial and nonfinancial data from external and internal systems, including vendor and purchase order information.

  • Collaboration: Facilitate collaboration across internal departments and functions to efficiently organize suppliers and contractors.

  • End-to-End Supplier Lifecycle Management: Utilize platform-based software for comprehensive third-party risk analysis, including upfront risk assessment, detailed supplier audits, sanctions checklists, structured internet research, automated risk assessments, and continuous screening.

  • Policy Tracking: Centralize policy statements and maintain records of communications with supply-chain partners, ensuring easy management and distribution.

  • Corrective & Preventative Actions (CAPA): Implement automated systems to send corrective action plans to suppliers, tracking schedules and milestones for CAPA fulfillment.

  • Whistleblower Processes: Establish a robust reporting mechanism, or whistleblowing process, to allow employees at various levels of the supply chain to confidentially report human rights and environmental violations.

  • Automated Reporting: Enhance transparency with technology-based supply-chain due diligence that generates audit-ready Environmental, Social, and Governance (ESG) reports for efficient documentation and sharing.

What do organizations need to do to comply with SCDDA?

Whether the activities are carried out in Germany or overseas, companies must keep a close eye out for and respond to any violations that arise during their own operations and those of their direct suppliers. This includes everything from the procurement of raw materials to the delivery of finished goods. An organization must conduct a risk analysis right away if it learns of possible human rights or environmental standards violations by indirect suppliers. Organizations are clearly held accountable by the Act for the performance of their supply chains, and any problems that are found must be addressed with prompt action and significant remediation.

The actions that organizations should take are listed below:

  • Monitor own operations and direct suppliers globally.
  • Take immediate action on identified violations in the supply chain.
  • Extend monitoring to indirect suppliers, conducting prompt risk analysis for potential violations.
  • Implement a clear and effective remediation plan for identified issues.
  • Maintain transparent documentation of monitoring and remediation efforts.
  • Communicate effectively with stakeholders about identified violations and remediation efforts.
  • Conduct training programs to raise awareness of environmental and human rights standards.
  • Ensure legal compliance in both domestic and international operations.
  • Focus on continuous improvement in supply chain practices.
  • Regularly report on supply chain performance and remediation progress to relevant authorities and stakeholders.

Organizations fall under the scope of the SCDDA cover:

The SCDDA (German Supply Chain Due Diligence Act) outlines two phases for bringing organizations under its scope:

  • Phase 1 (From January 2023):

The SCDDA will initially apply to enterprises based in Germany with more than 3,000 employees. This includes both German companies and German-registered branches of foreign companies with over 3,000 employees. The employee count also considers personnel posted abroad for domestic companies. Group companies are included in the calculation of the number of employees of the parent company. The Act defines employees as "any worker with an employment contract for longer than six months." This phase will cover approximately 600 companies.

  • Phase 2 (From January 2024):

In the second phase, the scope will broaden to include enterprises based in Germany with over 1,000 employees. This includes German-registered branches of foreign companies with greater than 1,000 employees. Once this second phase is enacted, the criterion will apply to roughly 2,900 companies.

Key dates in the full rollout of the German Supply Chain Due Diligence Act

Key dates in the full rollout of the German Supply Chain Due Diligence Act.jpg

In what ways does the German Supply Chain Due Diligence Act address environmental risks?

The SCDDA aims to address and mitigate environmental risks associated with these conventions by holding companies accountable for their supply chain practices. Organizations falling under the scope of the Act are required to conduct due diligence to ensure compliance with these environmental provisions and take measures to prevent and address any violations within their supply chains. The German Supply Chain Due Diligence Act (SCDDA) defines environmental risks as situations in which there is a sufficient degree of probability based on factual indications that a violation of specific prohibitions related to environmental conventions will occur. The Act specifically refers to violations of the following international environmental agreements:

Minamata Convention:

  • Manufacture of mercury-added products in accordance with Article 4 of the Convention.
  • Use of mercury or mercury compounds in manufacturing processes in accordance with Article 5 of the Convention after the phaseout date.
  • Handling of mercury waste contrary to the requirements of Article 11 of the Convention.

Stockholm Convention on Persistent Organic Pollutants (POPs):

  • Production and use of chemicals according to Article 3 of the Convention.
  • Non-environmentally sound handling, collection, storage, and disposal of chemical waste contrary to the requirements of Article 6 of the POPs Convention.

Basel Convention:

  • Export of hazardous wastes and other wastes according to Article 1 of the Convention.
  • Export of hazardous wastes from states listed in Annex VII of the Basel Convention to states not listed therein.
  • Import of hazardous wastes and other wastes from non-state parties of the Convention.

SCDDA's Impactful Focus Areas :

The key focus areas of the Social and Corporate Due Diligence Act (SCDDA) :

The SCDDA appears to be a comprehensive framework that encourages businesses to adopt ethical and sustainable practices throughout their operations, with a particular focus on labor rights, human rights, environmental impact, risk management, and transparent reporting.

  • Labour Rights Data and Policies:

Data Assessment:

To comply with the SCDDA, companies must embark on a journey of self-discovery. A comprehensive analysis of labor practices becomes paramount—scrutinizing factors such as fair wages, reasonable working hours, and adherence to labor laws. This may involve a meticulous examination of payment structures to ensure they not only meet but exceed minimum wage requirements, fostering an environment of fairness and equity.

Policy Evaluation:

The SCDDA places a spotlight on the efficacy of labor rights policies. Companies are urged to assess and, if necessary, fortify these policies to prioritize the well-being and equitable treatment of their workforce. This could manifest in measures to prevent discrimination, harassment, and the establishment of safe working conditions, creating a workplace where employees thrive.

  • Human Rights Policies:

Holistic Approach:

Human rights extend beyond the prevention of forced labor. The SCDDA encourages a holistic approach, urging companies to address broader issues like preventing human trafficking and upholding fundamental human rights principles. An exemplary company might conduct thorough assessments of its supply chain to ensure it remains free from any form of exploitation.

  • Environmental Data and Policies:

Quantitative Analysis:

Environmental sustainability takes center stage with a mandate for companies to provide quantitative data on their ecological footprint. This includes metrics on carbon footprint, energy consumption, waste generation, and water usage. Forward-thinking companies may invest in eco-friendly technologies or adopt sustainable sourcing practices to actively reduce their environmental impact.

Policy Effectiveness:

The SCDDA goes beyond mere compliance, pushing companies to actively seek sustainable solutions. An environmentally conscious company might assess the impact of its sourcing policies on deforestation and take tangible steps to source materials responsibly, contributing to the larger goal of ecological preservation. 4. Risk Prevention and Management:

Identification and Prevention:

Proactive risk management is a cornerstone of SCDDA compliance. Companies are mandated to actively identify and prevent various risks within their supply chains, spanning financial, operational, and reputational realms. This could involve the implementation of rigorous due diligence processes to identify and mitigate potential risks associated with suppliers, ensuring a resilient supply chain.

Comprehensive Analysis:

Comprehensive risk management practices are the need of the hour. This involves in-depth analyses of potential risks and the development of strategies to mitigate them. Diversifying the supplier base is one strategy that forward-looking companies might employ, reducing dependency on a single source and minimizing disruptions in the supply chain. 5. Training, Policy Implementation, and Remedial Action:

Human-Centric Approach:

At the heart of the SCDDA is a human-centric approach, focusing on the workforce. Companies are not only expected to implement CSR policies but also to assess the effectiveness of training programs. This could include educating employees on ethical business practices, promoting diversity and inclusion, and instilling a sense of shared responsibility for the greater good.

Responsive Measures:

Swift remedial action is a non-negotiable. The legislation emphasizes the importance of efficient complaints procedures and responsive measures. Establishing mechanisms like whistleblower hotlines or conducting regular audits can help companies promptly identify and address any breaches of ethical standards, fostering a culture of accountability. 6. Documentation and Reporting:

Transparency and Accountability:

The SCDDA mandates clear documentation and reporting on CSR activities, fostering transparency and accountability in corporate practices. Companies are required to adhere to reporting standards and communicate their efforts openly. This could involve the publication of annual CSR reports, disclosure of supply chain practices, and active engagement with stakeholders to gather feedback and ensure continuous improvement.

Conclusion

In summary, the implementation of the German Supply Chain Due Diligence Act (SCDDA) underscores the critical importance of a robust sustainability approach for companies operating in Germany. Meeting due diligence requirements for environmental standards and human rights is no longer just a legal obligation but a business imperative. Failure to comply not only poses economic risks, including fines of up to €8 million, but also carries the potential for severe reputational damage. Companies must prioritize ethical and sustainable practices across their supply chains to navigate the evolving regulatory landscape and ensure unhindered operations in Germany.

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