Brief description of the content of the Act
The German Law on Corporate Due Diligence in Supply Chains establishes binding due diligence obligations for companies that satisfy certain requirements to prevent human rights abuses and environmental harm in their supply chains and subsidiaries.
1. Context of the legislation
The German Law on Corporate Due Diligence in Supply Chains (hereafter referred to as German Law or LkSG) fits into a broader context of national and international legal initiatives aimed at ensuring that business practices are consistent with respect for human rights and environmental protection. Its enactment marks a significant step toward fulfilling the objectives of the German National Action Plan (NAP/2016-2020)[1] for the implementation of the United Nations Guiding Principles on Business and Human Rights (UNGPs)[2], issued by the German Federal Government in 2016 in response to several significant human rights violations[3]. In this context, Germany aligns with other European States by enacting legislation that renders certain elements of the UNGPs legally binding for business enterprises.[4]
2. Scope of application (§§ 1 – 2 LkSG)
Regarding the personal scope of application, the German Law applies to companies (Unternehmen) that fulfil specific territorial and size-related requirements, regardless of their legal form or country of incorporation (§ 1.1. LkSG). The due diligence obligations apply to companies that have their central administration (Hauptverwaltung), their principal place of business (Hauptniederlassung), their administrative headquarters (Verwaltungssitz), or their statutory seat (satzungsmäßiger Sitz) in Germany, as well as to companies with a branch (Zweigniederlassung) in Germany, provided they employ at least 3,000 employees within the country (the size-related requirement has been lowered to 1,000 employees as of 1st January 2024).[5] The coverage of the due diligence obligations under the LkSG extends beyond the business activities of the individual company directly subject to the Law, comprehensively including the entirety of such company’s supply chain (Lieferkette). The term “supply chain” encompasses all processes, conducted both domestically and internationally, required for the creation and distribution of the company’s products and services, from the extraction of raw materials to delivery to the end customer (§ 2.5 LkSG). This may include the activities of the company within its own operations (eigener Geschäftsbereich), as well as those of its direct or indirect suppliers.[6]
The areas of responsibility for companies subject to the Law are identified through reference to a series of international conventions (listed in the Annex to the Law), which have been ratified by the Federal Republic of Germany (§ 2.1 LkSG)[7]. By referring to the prohibitions established in these conventions and treaties – which encompass, for example, child and forced labour, gender discrimination, unfair remuneration, and pollution – the Law determines that a risk of human rights and environmental violations exists when based on factual circumstances and with sufficient probability, the imminence of non-compliance with such prohibitions can be established.
3. Due diligence obligations (§§ 3 – 10)
The German Law imposes a general human rights and environmental due diligence obligation (Sorgfaltspflicht) on companies that fall within its personal scope of application, aimed at preventing or minimising risk of human rights and environmental violations or at ending the violation of human rights-related or environment-related obligations (§ 3.1 LkSG). This general principle of due diligence should not be interpreted as a general clause from which additional due diligence obligations could emerge. Conversely, companies are bound solely by the obligations explicitly outlined in §§ 4 to 10 of the LkSG.[8]
Specifically, the LkSG mandates companies to implement risk management systems (Risikomanagement, § 4 LkSG) that enable the identification and minimisation of human rights and environmental risks, as well as the prevention, cessation, or mitigation of the extent of violations of human rights or environmental obligations, if the company has caused or contributed to these risks or violations within the supply chain. A key component of the risk management system is the conduction of an annual risk analysis (Risikoanalyse, § 5 LkSG), aimed at identifying, prioritising, and addressing human rights and environmental risks. The results of these analyses must be communicated to relevant decision-makers and significant changes in risk situations, such as the introduction of new products or business fields, require additional analysis.[9] Once the areas with the highest likelihood of risks or actual violations have been identified, companies are required to implement preventive and/or corrective measures (§§ 6–7 LkSG). Moreover, companies must document compliance activities, retain records for seven years, publish annual reports, and implement confidential whistleblowing mechanisms for reporting risks and violations (§§ 8, 10 LkSG).
The due diligence obligations are classified as obligations of means rather than obligations of result. This implies that companies are not obligated to guarantee the absence of human rights or environmental violations, nor to ensure that such risks never arise within their supply chains. Rather, they are required to meet the due diligence obligations as outlined in §§ 4 to 10 LkSG. Such obligations must be observed only to an appropriate extent (in angemessener Weise), considering factors such as the company’s size, the severity of the violation, and the company’s contribution to the risk or violation (§ 3.2 LkSG).
4. System of control and sanctions for non-compliance (§§ 11 – 24)
The Federal Office for Economic Affairs and Export Control (Bundesamt für Wirtschaft und Ausfuhrkontrolle - BAFA) is responsible for ensuring compliance with the LkSG (§ 19 LkSG). It can take action either through its own analysis of company reports (§ 13.1 LkSG) or in response to third-party complaints. Specifically, the BAFA is authorized to issue administrative orders to prevent or rectify violations (§ 15 LkSG), carry out inspections at companies subject to the law (§ 16 LkSG), and request relevant documents and information.
Violations of the obligations outlined in the German Law result in administrative liability. The BAFA may impose fines (§§ 23 LkSG) up to € 800,000, or up to 2% of the total annual revenue for companies with revenues over € 400 million (§ 24.3 LkSG). Furthermore, if a fine exceeds € 175,000, companies may be excluded from participating in public tenders for up to three years (§ 22.2 LkSG).
5. Potential adjustments of the LkSG in light of the new European Corporate Social Due Diligence Directive
In April 2024, the European Parliament approved the final version of the EU Corporate Social Due Diligence Directive (CSDDD)[10] and, after a month, the Council of the European Union also gave its final approval.[11] The Directive entered into force on 25th July 2024 and must be transposed into national law by 26th July 2026.
The CSDDD requires companies to “set up and carry out due diligence measures with respect to their own operations, those of their subsidiaries, as well as those of their direct and indirect business partners throughout their chains of activities”.[12] It is evident that the new Directive and the German Law pursue similar objectives and address the same fundamental issues.
However, the approaches adopted to achieve these objectives are not entirely aligned. Slight differences can be detected concerning the personal and the material scope of application of the two acts. Unlike the LkSG, the Directive does not adopt a form-neutral approach and outlines a broader catalogue of protected legal positions. Furthermore, the CSDDD introduces additional layers of responsibility, such as increased stakeholder involvement and civil liability. These discrepancies may require potential adjustments to the LkSG to ensure alignment.[13]
Further readings:
- Gehling, N. Ott (Eds.), LkSG - Kommentar, Dr. Otto Schmidt, Köln, 2022.
- Guercini, La legge tedesca sugli obblighi di due diligence nella supply chain (Lieferkettensorgfaltspflichtengesetz – LkSG), in Riv. dir. soc., 2022.
- Bordiga, A. De Maria, Tutela dei diritti umani nelle catene di approvvigionamento nell’ordinamento tedesco: la Lieferkettensorgfaltspflichtensgesetz, in Riv. soc., 2022.
Act/Judgment citation: Lieferkettensorgfaltspflichtengesetz vom 16. Juli 2021 (BGBl. I S. 2959)
[1] German Federal Government, National Action Plan “Business and Human Rights”, https://www.auswaertiges-amt.de/de/aussenpolitik/menschenrechte/wirtschaft-und-menschenrechte/nationaler-aktionsplan-wirtschaft-menschenrechte-205208 (last accessed on 30th December 2024).
[2] Human Rights Council, Guiding Principles on Business and Human Rights: Implementing the United Nations’ “Protect, Respect and Remedy” Framework, A/HRC/17/31 (21st March 2011), https://www.ohchr.org/sites/default/files/documents/publications/guidingprinciplesbusinesshr_en.pdf (last accessed 30th December 2024).
[3] One of the most striking tragedies in the German public's view was the disaster at the Ali Enterprises factory in Karachi, Pakistan, in 2012. More than 200 employees lost their lives in a fire, which became fatal due to the numerous fire hazards present in the factory and the lack of basic safety measures. For a reconstruction of the accident see European Center for Constitutional and Human Rights, Der Brand beim KiK-Zulieferer Ali Enterprises – Eine 3D-Simulation, https://www.ecchr.eu/fall/der-brand-beim-kik-zulieferer-ali-enterprises-eine-3d-simulation/ (last accessed 30th December 2024).
[4] D. Augenstein, S. Baroncelli, O. Farkas, Between Private Governance and Public Regulation: Covid-19 and Workers’ Rights in Global Garment Supply Chains, in International Community Law Review, 2022, fasc. 1-2, p. 88. The reference is to the previously enacted laws in France, Britain, and the Netherlands, which impose due diligence obligations on companies to ensure compliance with human rights within their business operations.
[5] It is estimated that around 2,900 companies are currently employing at least 1,000 employees in Germany and, as of 2024, will fall under the scope of the LkSG. See Bundestag-Drucksache 19/28649, p. 26.
[6] For a detailed analysis of the meaning of the individual terms used by the LkSG to define the personal scope of application see M. Nietsch, M. Wiedmann, Adressatenkreis und sachlicher Anwendungsbereich des neuen Lieferkettensorgfaltspflichtengesetz, in NJW, 2022, fasc. 1, p. 4.
[7] The Annex to § 2.1 LkSG lists eight conventions of the International Labour Organization (ILO), along with an additional protocol from 2014, which are referred to by the ILO itself as its eight core conventions. In addition, the Annex includes the two key UN covenants for the protection of human rights, the International Covenant on Civil and Political Rights (UN Civil Pact) of 19th December 1966 and the International Covenant on Economic, Social and Cultural Rights (UN Social Pact) of 19th December 1966, as well as three international conventions on environmental pollution.
[8] F. Mader, § 3 – Die Sorgfaltspflichten, in C. Gehling, N. Ott (Eds.), LkSG – Kommentar, Dr. Otto Schmidt, Köln, 2022, p. 292.
[9] For a more detailed insight into the meaning of the risk management and analysis systems see, A. Vicari, Risikoanalyse e Risikomanagment nella LkSG: spunti in tema di assetti adeguati nella catena di fornitura, in Giur. comm., 2023, fasc. 5, pp. 757 ss.
[10] Directive EU 2024/1760 of the European Parliament and of the Council of 13 June 2024 on corporate sustainability due diligence and amending directive (EU) 2019/1937 and regulation (EU) 2023/2859.
[11] See the press release at https://www.consilium.europa.eu/en/press/press-releases/2024/05/24/corporate-sustainability-due-diligence-council-gives-its-final-approval/.
[12] 19th recital of the CSDDD.
[13] For a systematic analysis of the necessary adjustments see U. Hagel, M. Wiedmann, Wie muss das LkSG aufgrund der CS3D angepasst werden?, in CCZ, 2024, fasc. 2, pp. 185 ss.