German regulation with global impact: The new supply chain law

Focus on human rights and the environment

Enacted in June 2021, the German Supply Chain Due Diligence Act (SCDDA), known in German as the Lieferkettensorgfaltspflichtengesetz (LkSG), was written in response to the above-mentioned challenges with the aim of increasing transparency and responsibility within supply chains worldwide. The new law mandates that companies from all sectors must address specific human rights and environmental  topics (Fig. 1) if they are to meet their due diligence obligations for global value chains.

Comparable legal requirements

Based on the UN Guiding Principles on Business and Human Rights, laws have been introduced around the world which require companies to protect human rights along their global supply chains. The UN Guiding Principles also serve as a cornerstone for the SCDDA. Not only does the German law align with other comparable legal requirements (Fig. 2), it can also be seen as a starting point, as the EU is currently discussing its Directive on corporate sustainability due diligence. The directive would establish rules and responsibilities for companies within the EU, requiring them to assess their supply chains for various fields of corporate responsibility and, if necessary, take action. The first draft of the EU Directive published on February 23, 2022 states several requirements that lead to stricter rules than stated in the SCDDA. Especially the thresholds for employees and net turnover will lead to more companies falling under this regulation. To be prudent, organizations should ensure they can respond appropriately.

Human rights and ecology are key

Larger enterprises first

Regardless of legal form, companies that have their central administration, their principal place of business, their administrative headquarters, their statutory seat or a branch office in Germany will be required to meet the obligations laid out by the SCDDA. As the government wants to achieve systematic compliance with the law, it was decided that enterprises with more than 3,000 employees must fulfill the law’s requirements from the beginning of 2023, followed by those with more than 1,000 from 2024 (including employees posted abroad).

Regulations defy international frameworks

This implies that Chinese companies with a subsidiary or legal entity based in Germany that employs the threshold number of people will fall within the SCDDA’s purview. Additionally, small and medium-sized companies are affected indirectly, as a company’s due diligence obligations also extend to its suppliers, which might include Chinese suppliers of German enterprises.

The SCDDA lays out specific due diligence rules. These are differentiated according to whether they apply to an organization’s own business area and to direct suppliers with whom they have a contractual relationship, or whether they apply to indirect suppliers (Fig. 3).

Compliance through transformation

In order to comply with the SCDDA, companies can consider making use of a supply chain transformation framework. This concept has been cross-functionally refined by PwC Germany in its SCDDA Centre of Excellence (CoE), which brings together the organization’s collective experience in the areas of risk, law, supply chains, human rights and sustainability. After reviewing a company’s status quo and identifying possible gaps, a strategy for meeting the law’s requirements can be defined and implemented. Additionally, the SCDDA requires both internal and external reporting and communication. The transformation process therefore includes defining internal responsibilities – for example, whether the responsibility lies within the Compliance or Sustainability department. Other success factors are stringent governance and an anchoring of the adopted measures in the existing management systems. 

Daniela Hanauer
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Michael Kula
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Obtaining information along the entire supply chain is essential if the overall transformation is to fulfill all requirements – and the need to obtain information about Chinese suppliers will thus rapidly increase in the upcoming months. This transparency ideally comes from technical solutions and through system-based processes and decisions. According to Daniela Hanauer, PwC Risk Consulting Partner and one of the founders of the SCDDA Center of Excellence, Germany, “Efforts are underway to analyze the suitability of the data available from the China Social Credit System for creating greater transparency along the global supply chain, but this can only be a starting point for demonstrating companies’ commitment to human rights and environmental due diligence! It must still be determined to what degree the collected information can be used for reaching the SCDDA’s transparency requirements and how it can be deployed for operational tasks like risk scoring and prioritization.”