German Supply Chain Act to affect businesses with 1000 or more employees from January 1

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Establishing an effective risk management system


From January 1 of next year, businesses with at least 1000 employees will also be among those affected by Germany’s Supply Chain Act, known as the “Lieferkettensorgfaltsgesetz” (LkSG), or “Lieferkettengesetz” for short. In order to meet the heightened due diligence requirements, it is essential for those concerned to put in place an efficient risk management system.


Businesses with 3000 or more employees have been feeling the effects of the LkSG since January 1 of 2023. The Act is aimed at improving the protection of human rights and ensuring compliance with environmental regulations within the supply chain. Central to achieving this is making sure that an effective risk management system is in place, a challenge which businesses with 1000 or more employees will have to rise to from 2024, notes Michael Rainer, managing partner and point of contact for business law at MTR Legal Rechtsanwälte.


Compliance with due diligence obligations critical


The legislation is intended to strengthen human rights and environmental protections within the supply chain. To this end, it imposes obligations on businesses, which must ensure compliance with defined standards of due diligence, both with respect to their own business operations and to the actions of contractual partners and other suppliers within the supply chain.


In order to achieve this, businesses must first identify and assess the existing risks in their supply chains. This kind of analysis should be carried out once a year, or more frequently if the underlying conditions change and the risks increase as a result.


At the same time, companies must go about fulfilling their due diligence obligations in an appropriate manner. These obligations are graded and are based on the type and scope of the company’s business activities and on its influence on the direct perpetrator of human rights violations or environmental offenses.


Risk analyses and preventative measures


These obligations are listed in Section 3 LkSG, including the obligation to set up a risk management system, to define internal responsibilities, to carry out regular risk analyses, to issue a policy statement, and to establish preventative measures and take corrective action.


It is also necessary to set up a functioning complaints department with the intention of enabling people in the supply chain to highlight any grievances. It is crucial in this context to guarantee the anonymity of whistleblowers.


While much of the attention is focused on businesses with 1000 or more employees and what the LkSG has in store for them come January 1, 2024, medium-sized companies will also have to adapt to the new requirements if they are part of the supply chain.


MTR Legal Rechtsanwälte can advise on the implementation of and compliance with the LkSG, as well as other aspects of business law.


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