Germany Adopts New Environment Due Diligence Law

27 Oct 2021

5 min read

On the 11th of June 2021, the German Parliament adopted a potentially revolutionary Supply Chain Act (‘the Act’), which establishes that the biggest German-based companies will be required to establish comprehensive due diligence procedures to prevent human rights and environmental abuses within the course of their business, as well as within their global supply chains.

The proposed Act, which is sometimes referred to as the ‘Due Diligence Act’, establishes a definition of a “supply chain”, which encompasses all the products and services of a company. Its scope extends from the extraction of raw materials to the delivery of the final product or service to the customer. This may sound rather abstract but in fact, the main aim of the law is to force companies to take responsibility for any labour or environmental abuses in their global supply chains. It focuses on combatting issues such as modern slavery, child labour, and workers’ health abuses among others.

New obligations imposed on companies

One of the central obligations placed on companies is the performance of a comprehensive risk analysis, where the risk of a violation of a human right or environmental obligation is analysed, taking into account all of the sites of a company, all of the business processes in its supply chain, and also certain contextual characteristics, such as political frameworks. The Act will impose an obligation on companies to check their compliance rules with their direct suppliers regarding defined social standards such as working conditions, and health and safety requirements.

Essentially, under the proposed Act, companies will not be required to guarantee the absence of human rights or environmental abuses, but rather, will be under an obligation to demonstrate that comprehensive and robust due diligence procedures have been put in place in their supply chains in an “appropriate manner” by identifying, addressing, preventing, and remedying any abuses. Companies will also be required to publish a report on an annual basis, outlining the steps they have taken to identify and avert human rights risks, and national authorities will be authorised to initiate administrative action or impose fines on companies which fail to carry out their obligations. Notwithstanding the above, since this essentially boils down to assessing the ‘appropriateness’ of measures implemented by a company, an element of discretion and subjectivity will always prevail.

Past experience has shown that governmental efforts to appeal to companies to voluntarily address these issues of environmental and human rights abuses were not effective enough, and did not reach the intended objectives. In light of this, Germany went a step further by adopting this Act which will now be binding on companies and will give power to public authorities to impose sanctions for any failure to observe the obligations contained therein. Whilst certain business associations opposed this decision, other companies, even multinational ones, expressed their support towards the proposed Act.

During the first year of its entry into force, the Act will only be applicable to German-based companies employing a minimum of 3,000 employees. From January 2024, the threshold will be lowered to companies with 1,000 employees. In cases of severe violations of the due diligence obligations set out in the Act, companies could risk being excluded from the opportunity to participate in public tenders for up to three years, and possibly be exposed to fines of up to 2% of their annual global turnover.

Should Europe be inspired?

The European Commission has expressed its intentions to present a proposal for the adoption of a European Supply Chain law before the end of 2021, which proposal could, if all things go well, be adopted by the Council and the European Parliament in 2022. Back in October 2020, the European Parliamentary Research Service (‘EPRS’) noted that, as a consequence of globalization, several multinational companies have gained unprecedented power and influence, even at global levels, sometimes enabling them to avoid liability for their harmful impacts on local communities, by using the ‘corporate veil’ as a shield, or by exploiting poorly enforced domestic regulations in developing countries – but this exploitation has to stop.

Through a European Supply Chain law, Member States will be obliged to hold companies liable under civil law for human rights and environmental abuses caused along the supply chain. It is unlikely that the adoption of a European Supply Chain law will be achieved before the envisaged entry into force of the German law, which is expected to occur at the beginning of 2023, but change is definitely underway.

What does this mean for Malta?

Should Malta follow suit and set up a similar legislative framework, like the proposed German Supply Chain Act? The rapid adoption of a Maltese regulatory framework in this regard would indeed boost political voluntarism in Europe, and contribute to the attainment of the United Nations Sustainable Development Goals, whilst also placing Malta at the forefront in this regard, together with Germany and other Member States which might choose to opt for similar legislative measures.

This is particularly necessary in Malta due to the fact that many Maltese companies tend to have a very weak Corporate Social Responsibility (‘CSR’) approach, and fail to take sufficient account of the social and environmental impacts of their activities. The adoption of a similar Maltese law would also complement the Government’s vision in the field of Environmental, Social and Corporate Governance (‘ESG’) and CSR, and the imminent adoption of the Social Enterprise Bill.

Potentially functioning in a manner similar to that of the General Data Protection Regulation (‘GDPR’), the proposed Supply Chain Act could lead to the imposition of a significant amount of responsibility on companies to ensure compliance with such legislation, and if combined with complaint procedures or whistleblowing systems similar to those in the field of competition law, this is likely to result in a significant risk for companies. The proposed Act is definitely expected to have far-reaching effects, serving as a pioneer regulation for Europe, and the rest of the world.