On January 1, 2023, the German Supply Chain Due Diligence Act (SCDDA) will come into force, requiring in-scope companies to identify and assess risks to human rights and the environment within their supply chains, and establish effective risk management systems. The new act joins a chorus of other relatively recent laws that seek to eliminate child and forced labor from global commerce and improve working conditions for all those in a supply chain.
Under GSCA, companies are required to make a reasonable effort to identify hidden risks to ensure compliance. Similar to the 2015 UK Modern Slavery Act, SCDDA serves to implement the United Nations Guiding Principles on Business and Human Rights.
The Scope of SCDDA
The act initially applies to German-based companies with more than 3,000 employees and foreign-based companies of the same size with registered German branches. In 2024, the size requirement shrinks to 1,000 employees.
The scope of SCDDA expands considerably when its requirements are considered. For instance, the obligation for in-scope companies and their direct suppliers to establish preventative measures is a key requirement of the act. The act also holds in-scope companies accountable for any infractions in the entire supply chain, which will create further due diligence requirements for direct and indirect suppliers. These factors mean that EU and non-EU companies, small and large, will likely see increased customer requests related to human rights due diligence.
The European human rights landscape is changing. Download Assent’s webinar Journey Towards a New Corporate Duty to Conduct Human Rights and Environmental Due Diligence to learn how to prepare.
Risk Assessments & Reporting
Issues covered by the legislation include, but are not limited to:
- Human Rights
- Forced labor.
- Child labor.
- Decent working conditions.
- Environmental
- Harm caused by pollutants.
- Toxic chemical exposure (such as mercury).
- Unsafe disposal of hazardous waste.
Only environmental concerns that are likely to have adverse impacts on human rights are subject to SCDDA. For example, negative impacts on human health and natural resources on which people depend, or denying people access to safe drinking water or sanitation.
Companies are also required to file annual reports on their due diligence activities. These reports will detail the actions taken to identify risks and any subsequent action triggered if those risks are found. The reports are likely designed to hold companies accountable, similar to conflict minerals report requirements in the U.S. Companies should ensure that their SCDDA compliance processes are robust enough to withstand scrutiny as ineffective measures could lead to non-compliance penalties.
Failure to meet SCDDA requirements could lead to fines up to €800,000 and a three year exclusion from public contracts. For companies earning more than €400 million in annual turnover, fines can reach up to two percent of worldwide turnover.
Human Rights Due Diligence Around the World
The act is just one in a long line of new and upcoming regulations creating obligations for companies to carry out human rights due diligence on their supply chains. These include the:
- EU Mandatory Human Rights Due Diligence Directive.
- Swiss Human Rights Due Diligence Law.
- Norwegian Transparency Act.
- Dutch Due Diligence Act.
Other jurisdictions such as the UK, Australia, and U.S. have pre-existing laws related to business and human rights.
It is therefore important for companies to develop a strategic and comprehensive approach that enables them to respond to the requirements of multiple regulations, rather than individual regulations. Such an approach must effectively address the supply chain component.
Investors Pushing
Governments aren’t alone in demanding more environmental and human rights due diligence from companies. Investors and consumers are increasingly calling for greater environmental, social, and governance (ESG) accountability from companies. BlackRock Inc., the world’s largest investment firm, called on companies to implement processes largely aligned with GSCA. A 2020 Gartner report found that 85 percent of investors cited ESG factors as a key measurement when considering allocating funds. This means that access to trillions of dollars worth of capital could depend on strong ESG programs, including human rights due diligence processes.
Uncovering Hidden Risks
One challenge in meeting SCDDA requirements, as well as meeting greater ESG goals, is finding hidden risks in large supply chains. The further down a supply chain you go, the harder it is to get timely, accurate data. Without this data, it’s impossible to confidently assess supply chain risks.
Assent delivers deeper supply chain insights by leveraging indirect monitoring and direct supplier engagement. By analyzing global media and government watchlists, Assent is able to deliver insights into your suppliers and their relationships that wouldn’t otherwise materialize in self-reported declarations.
Supplier engagement is crucial to building a strong ESG program, however. Assent aligns with Global Reporting Initiative (GRI) and Sustainability Accounting Standards Board (SASB) standards to ensure robust, clean data from your suppliers. Information from both indirect and direct actions is then rolled up into an easy-to-use dashboard that lets you identify risks and prioritize suppliers with strong ESG performance.
You can learn more about our ESG solution here, or if you have any questions, contact our experts.
