The German Supply Chain Due Diligence Act goes into effect January 2023 and is already making waves within supply chain, risk management, and compliance communities.
The Act follows Environmental, Social, Governance (ESG) frameworks, and is designed to help identify, mitigate, manage, and eliminate environmental and human rights violations within organizations’ own operations, as well as within the operations of their direct and indirect suppliers. While the law was already passed, it goes into effect for in-scope companies in January of 2023 and will expand its scope in 2024.
This Act follows on the heels of the UN Guiding Principles on Business and Human Rights which is already in practice in several other nations.
This law seeks to eliminate unethical practices from supply chains through monitoring, assessing, and mitigating risks such as:
The law places due diligence on companies that have a principal location in Germany with 3,000 employees, and foreign companies that have branches in Germany with 3,000 employees. In 2024, this will decrease to companies with a principal location in Germany with 1,000 employees and foreign companies who have branches in Germany with 1,000 employees. This will require in-scope organizations to comply with environmental and human rights standards.
Smaller organizations may also be affected if they are a link in the larger organization’s supply chain, and organizations must find a way for suppliers to be able to file any complaints to alert the company they work with.
In-scope organizations who are aware of violations of the Act and who do not take remedial actions will be penalized with financial penalties of €50,000 and administrative fines of up to 2% of their annual average revenue if it exceeds €400 million.
In addition, if non-compliance occurs organizations can be removed from the award process for public procurement contracts for up to three years.
The German Supply Chain Due Diligence act specifies several obligations that in-scope organizations must adhere to. Aravo helps by providing an ESG solution that helps organizations identify risks, implement best practices, manage supplier activities, and more. These obligations include:
What do you need to do? Organizations need to create a risk management system, analyzing their own human rights and environmental risks, and risks of their direct suppliers.
Where does Aravo come in? Our ESG solution helps customers identify supplier risk with assessments aligned to the law, and risk intelligence data to help segment suppliers and prioritize risks.
What do you need to do? Organizations will need to appoint a human rights officer who is responsible for monitoring risk management in supply chains.
How can Aravo help? Aravo helps gain greater transparency with automated risk management processes and provides visibility to all relevant stakeholders.
What do you need to do? In-scope companies must carry out risk analyses at least once a year, and on an ad-hoc basis as needed.
Where does Aravo come in? Our solution automates the risk assessment process during onboarding on an annual basis. You can also re-assess suppliers on an ad-hoc basis.
What do you need to do? Companies will need to establish a policy on how they will fulfill the Act, establish priorities for human rights and environmental risks, and expectations for employees and suppliers.
How can Aravo help? Customers can post their policy on their supplier portal, and ask suppliers to attest/certify their acceptance and how they’ll abide by it.
What do you need to do? Organizations must implement procurement and purchasing practices, deliver training, and establish control measures to verify compliance.
Where does Aravo come in? Aravo supports this with dashboards and reports to verify compliance. You can also embed policy & training content, and ask for attestation from suppliers into your human rights and environmental policies.
What do you need to do? Organizations need to take remedial actions to minimize a potential violation. If it cannot be stopped, they must work to end or minimize the violation.
How can Aravo help? Our complete lifecycle management supports onboarding to termination. If a violation occurs, we track remediation actions to bring the supplier back into compliance.
What do you need to do? Companies must establish a procedure enabling people to report violations in their own business area or that of a direct supplier.
Where does Aravo come in? Actions and remediations can be tracked and monitored in Aravo, and risk scores will be adjusted. Suppliers can also self-report issues in the Aravo platform.
What do you need to do? If supplier misconduct occurs, organizations must address the risks, implement preventative measures, and update their policy statement.
How can Aravo help? Risk mitigation strategy actions and plans are cornerstones you’ll be working with. Preventative measures and policy updates can be done with our platform.
What do you need to do? Organizations must report on the fulfillment of their due diligence obligations annually, and make them publicly available.
Where does Aravo come in? We support report creation with dashboards, reports, and metrics with risk mitigations, exposures, and other functionalities.
Whether you are in-scope for compliance with the German Supply Chain Due Diligence Act or expect you’ll be seeing future regulations that will affect you down the line, it’s important to begin identifying environmental and human rights risk exposures within your operations, and down your supply chain. Our experts are on hand to help you during this process, and feel free to explore our resource library to brush up on ESG and compliance thought leadership in the meantime.
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