Whether it’s child labour in cocoa plantations, workers’ exploitation in textile factories or poisoned rivers: all too often, companies are not responsible for how their global businesses affect the environment and people. The Supply Chain Act could change that. But quarrels from the economy are blowing hard.
We have to talk. And that over a tiny piece of milk chocolate for about 89 cents that you just indulged in. In a globalized world, it is a very complex product. For a chocolate treat, the farmer can get only 6 out of 89 cents. And the story of two million children in West Africa working on cocoa plantations under exploitative conditions. They carry heavy bags of cocoa, work with machetes, and spray toxic pesticides without protective clothing.
Of course, this is not allowed. But the path from cocoa beans to the supermarket shelf is virtually unacceptable. Until it ends up at Ferrer, Nestlé, Mars & Co., it goes through the hands of smallholders, collection points, subcontractors of large corporations and processors in Germany and the Netherlands. In the end: the supply chain can no longer be traced. Similarly opaque is the supply chain for electrical appliances such as mobile phones and laptops, clothing and other foods. Behind this are platinum mining, the textile industry, oil palm plantations. However, they all attract attention by exploiting people, using pesticides illegally and taking away land and none of it is punished.
Is Made in a guarantee?
That's a nice thought. After all, local companies credibly assure us that their suppliers respect human rights, environmental and climate protection standards. But again, this is it: the supply chain problem. The companies are usually buyers and importers. And they are just at the top of the supply chain. However, exploitation begins far behind. Do we as consumers have any influence at all? Unfortunately, surprisingly small. In some areas, it is possible to buy fair products, such as the aforementioned chocolate, but there is no fair laptop on the market. Another example? Use of pesticides. For example, paraquat pesticides have been banned in the EU since 2007, but are still used on global palm oil plantations. And palm oil is found in 50 percent of the foods in our supermarkets.
If someone violates rights in a remote part of the world, neither supermarkets, manufacturers nor other companies are currently legally liable. And voluntary self-regulation works only in very rare cases. Only a third of EU companies are currently carefully reviewing their global supply chains for human rights and environmental impact.
Supply chain law is inevitable
In March 2021, the EU also addressed the subject of the Supply Chain Act. While the EU is currently preparing a directive on the identification of environmental, social and managerial risks (EGF), Germany has already introduced a legal framework focusing on the ESG (Environmental, Social, and Governance). The German supply chain law, which will come to life in the coming years, also focuses on keeping the supply chain 'clean'. A company that meets this requirement is aware of the potential threats in its organization, its supply chain, and also in all of its business partners. When German companies have to adapt their operations to customer requirements, this will certainly affect other countries in which they procure. When choosing suppliers, the focus will not only be on the financial situation and business stability of potential business partners, but also on how they handle water and what working conditions prevail in the company. At its meeting on 3 March 2021, the German federal government approved a proposal for a new law on supply chains (Lieferkettengesetz). The proposal provides for far-reaching obligations for large companies to prevent violations of human rights and environmental legislation in their global supply chains. The proposal contains specific due diligence and reporting obligations for companies based in Germany regarding respect for human rights throughout the supply chain. From 1 January 2023, companies with at least 3,000 employees should be responsible for verifying their suppliers throughout the value chain; from 1 January 2024, this should also apply to companies with 1,000 or more employees. This would affect almost 2,900 companies.
Statement of fundamental principles and risk analysis
The law will oblige companies to introduce adequate risk management for respect for human rights, with the definition of human rights based on various international standards. Companies will be required to draw up a statement of fundamental principles and carry out a risk analysis. According to the text of the draft, the obligation to perform a risk analysis will initially apply only to the company's own business area and to direct suppliers. Indirect suppliers will only have to cooperate in special cases - e.g. if the company will have specific information or knowledge about possible human rights violations. Documentation and publication of measures If there are risks of human rights violations, companies will need to take precautionary measures. If human rights are violated, they will be forced to offer help. Appropriate measures will have to be documented immediately and summarized annually in a report published on the company's website. In addition, an appeal procedure will have to be launched to allow for the reporting of human rights violations or environmental obligations. The effectiveness of the various components of risk management will need to be reviewed at least annually.
Carrying out supervision in the hands of the BAFA office
A special body that will check compliance with the law and determine penalties in case of violations will be the German Federal Office for Economic Affairs and Export Control (BAFA). According to its powers, BAFA will be able to fine the company up to € 50,000 if the company refuses to participate. In the event of an intentional or negligent breach of the statutory duty of care, the amount of the fine must be based on the company's total revenue. In the event of serious infringements, the company may face exclusion from public procurement procedures for up to three years. NGOs can represent affected parties Non-governmental organizations (NGOs) and trade unions should also be able to represent the affected parties in German courts if there is a breach of standards in supply chains and the person involved agrees.
The ideal supply chain law
In the ideal scenario, companies are effectively encouraged to identify the biggest and most serious human rights risks in their entire value chain and, if possible, eliminate or correct them. It's all about prevention, that is, risks don't come first - and we don't usually find them in direct suppliers, but deeper in the supply chain.
It is important not to limit the ideal law to groups of companies: Even small companies with few employees can cause serious human rights violations in the global supply chain.
The German Supply Chain Act should be an additional impetus for the EU regulatory process. After all, this is a problem that affects us all.