Six months after the German Supply Chain Act, the EU made its proposal in February. The law in Germany will require companies above a certain size to monitor their immediate supply chains. These processes must be documented in a report. The European draft intends to expand responsibility and make it even more binding. With more extensive accountability along global supply chains and the introduction of civil liability for companies, the EU Commission sends a clear signal. It expresses the claim that European companies should be global leaders in sustainability performance. While the German supply chain act focused on human rights compliance, the EU one explicitly includes negative impacts on the environment and climate or biodiversity loss in its protection.
Will the German law and the EU Commission’s proposal be able to deliver what they promise in terms of improved protection of human and environmental rights? Small and medium-sized companies in particular will find it difficult to verify compliance within their supply chain when it comes to social and environmental standards in the third, fourth or even fifth stage of their chain. Many of these companies will have to go through a very steep learning curve here in order to keep up.
However, one thing is clear: If the draft directive is adopted, it will have a serious impact on German SMEs. Therefore, those who have not yet dealt with the issue should prepare themselves as quickly as possible.
Companies have gambled – and lost time and trust
Some time has already passed between the first call for a supply chain act and its implementation. For companies with more than 3,000 employees in Germany, it will now become serious in 2023. For companies with more than 1,000 employees2024. Even on a voluntary basis, this task should already have been taken on with determination. In fact, recent studies show that of the 2,900 German companies to which the federal law will initially apply, barely half carry out checks on their suppliers abroad. (Graf von Westphalen (GvW) law firm)
Crises expose weaknesses in the supply chain
Unfortunately, companies have not consistently followed through on their voluntary commitments to lessen supply chain risks. This is despite the fact that current global events such as war and a pandemic have made the weaknesses in supply chains frighteningly obvious in some cases.
Covid has highlighted the unmistakable weaknesses in supply chains as if under a burning glass. Quite obviously, the vulnerability of supply relationships has system because they were created under very limited business criteria. Human rights risks or natural resources have too often been inferior in procurement decisions, underestimated as a risk, and not assessed.
What no law can provide…
So it looks like companies will now have to be held accountable again if their negligent behavior harms people and the environment. And yet there is reason to doubt whether a law will be able to achieve much apart from an immense administrative and documentation burden. The supply chains involved are highly complex and often cannot be fully clarified even by the players involved.
Even an average medium-sized company can have many thousands of suppliers, who in turn have many more sub-suppliers. How far back do you want to go with textiles? All the way back to the first stage of production? All the way back to the cultivation of the cotton? Under the new law, indirect supply chains do not have to be explicitly monitored. It is sufficient to intervene if one is made aware of human rights violations. And why does the law only focus on large companies, when the majority of trade is handled by medium-sized companies?
… can be achieved by good reputation
This would not even require a law. Reliably documented and verifiable transparency, ratings and the threat of possible reputational damage could contribute much more to change than any national or European law. After all, history holds enough examples of how much supply chain negligence can damage a brand’s trust.
Sustainability reporting: validated sustainability reports can be a key component in building trust. Those who align their report with GRI guidelines will inevitably have to examine their supply chain from a risk perspective. The GRI Standards on
- Procurement Practices (204)
- Environmental Assessment of Suppliers (308) or
- Social Assessment of Suppliers (414)
leave no doubt as to what information is required here in order to be meaningful. (More info can be found on the blog on our Reporting topic page).
Ratings: it is already established practice in the capital market and other stakeholders will follow suit. For all their heterogeneity, ESG ratings have become an indispensable tool for analysts in assessing the sustainability of companies. Third-party assessments such as those by EcoVadis are increasingly a condition for access to the capital market or into the supplier portfolios of large companies. Why should such ratings not also increasingly form the basis for public sector contracts or in consumer guidance?
Transparency as a prerequisite for supply chain management creates public trust
The question remains as to the reliability of the information documented in the reporting. Even if these are checked by inspections and audits. But more initiative and prudence will also have to be demanded of auditors here in order to recognize the realities behind supply contracts. It is not acceptable that gaps in the presentation of governance structures go unmentioned in audit reports. Even worse: if they are even obvious to the audit layman, such as problems with supply chain controls.
If everyone does their job here, it is to be expected that digitalization and the Internet will increasingly ensure publicly accessible transparency and participation. Some of the supply chain data can already be secured via blockchains, and auditors have long known how to check the plausibility of the information they find.
The original article on the Supply Chain Act in German can be found at ECOVIS. The guest article by Andreas Severin was written before the law was passed.