Supply Chain Law | Lessons from Germany

Germany will introduce a law obliging companies to take responsibility for what happens along their supply chain. Is this a blueprint to stop human rights and environmental violations?

Modern day slavery, illegal deforestation, theft of water resources, and even child labour. The list of drawbacks related to the way food and other products are manufactured is long. For this reason, in February 2021 the German government agreed to a new law called Lieferkettengesetz (translating to “supply chain law”), which should come into effect in 2023. The idea is that companies with more than 3.000 employees will be obliged to take responsibility over their full supply chain, from raw material to the finished product.¹

Why do we need a law of this kind? 

Most products stand at the end of a long and international line of production steps. Take a chocolate bar as an example: The cocoa might come from West Africa, the sugar from Central America, the nuts from North America, and the final assembly might happen in Switzerland. This is not necessarily bad news. A survey of workers in Mexico, for example, has shown that production for foreign companies can actually enhance labor standards in local markets.² However, still too often the outsourced production of raw materials does not meet the standards of social and environmental sustainability held high within the European Union. Many German politicians are therefore arguing that if a company makes profits globally, it should take global human rights into account as well. 

What are the advantages of the law?

• Up until now, environmental and social standards have been applied by companies as voluntary commitments. However, very often these standards are still not met. To check whether big companies were meeting human rights along the supply chain, the German government had put up a monitoring system. This way, they found that the goal for compliance was not met by half of the companies.³ A global supply chain law will transform these voluntary commitments into mandatory ones. This way, companies will be forced to produce in a more sustainable way and to keep up fair working standards. 
   
• Despite perhaps resulting in slightly higher prices for products, a law of this kind  also seems to be greeted with enthusiasm by the public: A poll showed that 75% of Germans support it.⁴ 
   
• The law allows for fines if contractors abroad are found to breach human rights or environmental laws tied to them. And the fines are hefty: for companies exceeding 400 million euros, they can go up to two percent of the company’s annual revenues. If two percent seem little, here’s an example:  In 2019, the world’s largest food company Nestlé made a turnover of around 83 billion euros. In case of violations of the supply chain law, they could face fines up to 1.6 billion euros.⁵ However, Nestlé has expressed support for the proposed law. 

What are the disadvantages of the supply chain law?

• The law is not about implementing German social standards – which are generally very strict – everywhere in the world. Instead, it is about respecting basic human rights, which means that the law would push companies to do the bare minimum to protect their workers. It also does not provide victims of such human rights violations legal protection before German courts.⁶
   
• Many companies in the German food sector have less than 3.000 employees. In 2019, only 39 companies had more than 1.000 employees; roughly 5.500 companies had even fewer employees than that.⁷ The law is therefore not binding for large parts of the food industry. In 2024 the law is to be extended to also include companies with 1.000 employees and up. With this amendment, 2,900 garment companies would be affected, but the majority of the food industry would still be exempt from the law.⁸
   
• The law focuses mainly on social aspects. Environmental aspects only play a role when they are related to human rights – for example polluted drinking water at a factory. German environmental and human rights groups have therefore accused the German government of “watering down” the initial proposal.
   
• Fearing that companies could leave Germany due to this law, certain industry representatives have been calling for a European approach.¹
   
• Creating a new law doesn’t always mean it will be easy to implement it. An example: Even though Austrian law forbids cage-rearing of chicken, the vast majority of eggs found in convenience products in supermarkets still don’t have an indicator of origin. It is therefore very likely that 30 out of 31 products still contain eggs from cage-reared chicken. Time will tell how hard it will be to trace violations along various supply chains and hold companies accountable.⁹

Could the supply chain law be a blueprint for other countries?

Germany is the second country after France to introduce a similar law (which covers only large companies with more than 5,000 employees). Other countries like Austria, Denmark, Finland, Luxembourg, and the Netherlands are already working on similar laws or are being asked for similar laws by their citizens.¹ Norway on the other hand, is taking another approach: It just proposed a law based on transparency. Instead of just checking companies’ suppliers, all citizens can now request information on possible violations along the supply chain. This way, they hope to hold companies accountable through civil action, instead of companies themself reporting “in a selective way.”¹⁰ On a European level, a law of this sort is also in the making. Another EU study on due diligence requirements through supply chains has shown that a voluntary approach is not enough.¹¹ a In March 2021, the European Parliament approved an outline proposal for a EU Directive on Mandatory Human Rights, Environmental and Good Governance Due Diligence. The European Parliament could approve this new legislation in 2022. After this, the EU member states will be given time to include it in their national legislation – and that might take a long time. This means that the new law will likely be in place from 2023 at the earliest.