Risk analysis and compliance with German Supply Chain Act

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Germany’s new Supply Chain Act – the so-called “Lieferkettensorgfaltspflichtengesetz” (LkSG) – was formally adopted on January 1, 2023. One of the key issues addressed by the legislation is the evaluation of risks both within companies and with respect to their direct suppliers.

Having come into force at the beginning of the year, the Act initially affects businesses with at least 3,000 employees, but its scope is set to expand from 2024 to encompass companies with more than 1,000 employees. Its primary concerns include the protection of human rights and compliance with environmental standards in supply chains. Ultimately, the legislation places greater compliance demands on businesses, explains Michael Rainer, managing partner and point of contact for commercial law at MTR Legal Rechtsanwälte.

Among other things, the Act calls for the establishment of an appropriate and effective risk management system in companies to ensure that due diligence obligations are properly observed. This entails the company carrying out an adequate risk assessment pursuant to Section 5(1) LkSG in order to determine the human rights and environmental risks both in its own area of operations and with respect to its direct suppliers. This type of risk assessment is to be carried out once a year, as well as on an ad hoc basis if there is reason to expect a material change or development to the risk situation in the supply chain.

Companies must fulfill their due diligence obligations in an appropriate manner, i.e., they are staggered and, in accordance with Section 3(2) LkSG, are based on various parameters such as the type and scope of the company’s business activities, the company’s ability to influence the immediate perpetrator of a violation of human rights or environmental obligations, the severity of the violation, and the company’s own contribution to the cause of the violation.

Risk analysis also means a change of perspective for companies. In addition to operational factors, the LkSG specifically emphasizes the need to take into account human rights and environmental risks in the supply chain.

Although companies with fewer than 1,000 employees are not directly affected by the Supply Chain Act, they too must prepare for changes if they are suppliers to larger companies, as these customers will expect them to adhere to appropriate transparency standards regarding compliance with human rights and environmental regulations.

The team of commercial law experts at MTR Legal can advise on the implementation of the provisions set out in the German Supply Chain Act.

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