Have you started assessing your supply chain for forced labor and environmental risks? Under the German Supply Chain Due Diligence Act (SCDDA), German companies with 3,000 or more employees are required to evaluate, mitigate, and report on any potential risks they identify.
The non-compliance penalties are severe, including penalty payments, fines, loss of government contracts, and public scrutiny.
Despite all the risks, there is also a large business benefit to SCDDA compliance, and in today’s volatile global economy, creating a competitive edge is essential.
Your Requirements Under the SCDDA
Under the SCDDA, in-scope companies must meet nine high-level requirements:
- Establish a risk management system
- Define the party or parties responsible for compliance
- Perform regular risk analysis
- Issue a policy statement in line with SCDDA goals
- Form preventative measures within the company’s business unit and for direct suppliers
- Take corrective action when risks are discovered
- Create a complaints procedure
- Implement due diligence with regard to risks identified with lower tier/indirect suppliers
- Report on and document due diligence activities
Executing and implementing these tasks takes time. If you’re not meeting your requirements, you’re already severely behind your competition, putting you at a disadvantage and opening you up to non-compliance penalty risks.
You Don’t Want These Penalties
You’re familiar with non-compliance risks. How bad could they be under the SCDDA?
Well, this law’s penalties are unique in terms of severity and how devastating its penalties are. Not only can they result in serious damage to your bottom line, but they also help your competitors get ahead if they comply before your company does.
The non-compliance penalties include:
Penalty Payments
These penalty payments, up to €50,000, can be either recurring or periodic until non-compliance issues have been resolved.
Fines
Penalty payments aren’t the only cost that can be levied against non-compliant companies. Fines are even more onerous: they can be as high as €800,000 or two percent of the average annual global turnover for companies earning over €400 million.
Exclusion From Public Contracts
Non-compliance companies can also face exclusion from government contracts for up to three years. The revenue loss from this alone is substantial — potentially millions.
Reporting on Non-Compliance
Non-compliance can be reported easily to the responsible authority — a complaints procedure process has been established and the respective agency has clearly said they will follow up on any reports filed. Those that have not completed their due diligence properly could see themselves challenged by non-governmental organizations (NGOs), labor unions, and affected people — reporting companies to responsible authorities.
Even competitors could file non-compliance complaints against companies that fail to meet due diligence requirements.
The Benefits of Proactive Compliance
While seeking to avoid stiff penalties is a good reason to comply with the SCDDA, there is also a strategic reason for doing so — in short, it’s good for business.
The most overt benefit is the knowledge that your supply chain is free of forced labor and environmental risks. That alone helps protect your reputation and maintain consumer and investor trust.
But it goes deeper than that.
The Larger ESG Picture
The SCDDA does not exist in a vacuum. Globally, ESG laws are being proposed and implemented, many of which deal directly with environmental and human rights risks. Complying with the SCDDA doesn’t just help your business in the German market; it sets you up for success on the global stage.
Consider proposals, like the EU Forced Labor Ban or the Corporate Sustainability Due Diligence Directive (CS3D), which present market access risks and new reporting requirements.
Additionally, the Uyghur Forced Labor Prevention Act (UFLPA) creates a rebuttable presumption that all goods sourced from the Xinjiang Uyghur Autonomous Region (XUAR) were made with forced labor and are therefore barred from entering the U.S. market. Non-compliance with the UFLPA results in the detention of goods at the border, resulting in lost revenue and reputational damage.
However, companies that eagerly and proactively comply with the SCDDA — setting up required risk management systems and preventative measures — will more easily comply with laws like the UFLPA or existing and developing initiatives in other EU member states. That reduces your non-compliance risk there, too, further bolstering your competitive advantage on the world stage.
In this way, it’s not just about complying with individual laws. Since ESG is the new global standard, your company needs to be able to pivot easily as new laws are introduced and existing laws expand.
The UFLPA is just one example of a larger trend. In Europe, proposals like the EU Forced Labor Ban and the Corporate Sustainability Due Diligence Directive (CS3D) present market access risks and new reporting requirements.
The U.S. Securities and Exchange Commission (SEC) Mandatory Climate Disclosure enhances and standardizes climate impact disclosures for all publicly traded companies, including a requirement to disclose emissions from upstream and downstream activities (scope three), if material, or if the company’s greenhouse gas targets or goals include scope three emissions.
The point is clear: preparing for the SCDDA doesn’t just help you now, it helps you in the future. As regulations grow more stringent and the market becomes more competitive, you will be set up for success while your competitors scramble to meet these global regulatory requirements.
Assent Can Help
Complying with ESG regulations is a full-time job. You already have one, so let us do the heavy lifting.
With Assent, you can keep track of evolving regulations through a combination of our subject matter experts and our Assent Supply Chain Sustainability Platform. All of this information is presented on configurable, intuitive dashboards, allowing you to see your risks and your requirements at a glance.
Plus, with Assent’s ESG solution, you can deep-map your supply chain, uncover hidden risks, and mitigate them as soon as possible.
If you’d like to learn more about how Assent can help you grow better, contact us at info@assent.com.
