The German due diligence law - Why every fashion company needs to know their entire supply chain

4 Minute Read

The term supply chain due diligence act (LkSG) already indicates how complex the associated topic is. No wonder companies are finding it difficult to assess the impact of the new law. The fact is that the LkSG will come into force on January 1, 2023, for companies based in Germany and companies with a branch office with at least 3,000 employees in Germany. One year later, from January 1, 2024, companies with at least 1,000 employees in Germany will also be affected. The law aims to improve the international human rights situation by making it legally binding to ensure certain standards of due diligence in supply chains.

Who is affected by the law?

In the medium term, the law affects all companies in the fashion and textile industry. However, even companies that do not yet immediately fall under the LkSG according to their number of employees will feel the effects due to the diverse links in global production networks. Particularly in the fashion and textile industries, logistic routes are closely intertwined. Large companies that fall under the law's due diligence will also apply the new rules in their supply chains. This is the only way they can comply with the law at all. Thus, the law also applies indirectly to companies with fewer employees. Therefore, these companies should also establish certain processes and measures in preparation for the law. Communication and cooperation between the participants in a supply chain are essential to ensure direct exchange between retailers and manufacturers.

Problems with supply chains & CSR in the company

The lack of communication and collaboration between supply chain participants is the crux of why it currently seems so difficult to implement the requirements of the LkSG. Often, retailers know their direct suppliers. The indirect suppliers, however, blur into an anonymous mass and are difficult to identify. Most companies can only dream of the necessary transparency in production networks. However, due to the changing attitude of many politicians and the resulting legislation - for example, besides the LkSG in Germany, the Withhold Release Order in the USA, or the Transparency Act in Norway - companies are also rethinking the sharing of information about material origin and production. (Read more about our project with Décor Global here).

But even though the LkSG is coming closer: the strategic role that environmental and social issues should play for companies can be seen in very few companies. This is also due to the fact that in many companies, no team is yet officially responsible for CSR management. Often, other employees and departments take on the tasks of this role, such as quality management or purchasing. This makes it difficult to effectively implement sustainability efforts. With regard to the LkSG, however, an independent CSR department would be particularly important, since the law requires human rights officers to take care of compliance with the law within the company. Therefore, there is no way around establishing a separate CSR management team in the company. It is best to establish this team as broadly as possible and create appropriate links to the other teams. Birgit Karpa-Beuth, Managing Director of GSM Consulting, gave this tip to the participants in our webinar on the topic of LkSG. Because thanks to company-wide networking, the sustainable implementation of CSR measures can be guaranteed. In the future, there is no way around dealing with one's own supply chain and establishing supply chain management processes in one's own company. 

How do you prepare for the LkSG?

The first step is to check the status quo. This is the only way to identify where there is an urgent need for action, where measures have already been taken, and at which interfaces synergies could be created. This also includes informing all employees about the law and providing appropriate training. A risk analysis of the existing supply chains is also part of the status quo survey. This involves recording all existing and potential risks, assessing them in terms of severity and probability, and prioritizing them accordingly. In order to obtain a realistic assessment, it is important to take a close look at the production countries and check for aspects such as the human rights situation or environmental legislation. For this reason, the retraced risk analysis is based on the OECD sector risks and provides an insightful overview of the current situation of all countries.

Also part of the status quo inquiry is the analysis of current products, their material origin, and production processes such as, for example, dyeing. Measures already established within the company or at suppliers should also be included to see whether they are sufficient or need to be improved. Here, too, the relationship with suppliers plays an important role in facilitating the exchange of information and data. In addition, the inclusion of customer requirements offers an opportunity to take improving measures beyond the legal requirements. In this regard, Claudia Landgraf, Managing Director of t+m CSR Consulting, mentions the particular importance of evaluating sustainability management at the end of the year in order to be able to obtain preventive measures and to be able to design measures in a more targeted and concentrated manner.

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Criticism of the law

According to the current state of the legislation, the LkSG still has room for improvement. For example, companies are currently only required to analyze their supplier network if there is already substantiated knowledge of human rights violations. This poses a risk that certain risks will not be prioritized or even included at all. Overall, the focus is placed entirely on controls and therefore offers little incentive to already establish preventive measures. Further potential for improvement arises from the fact that, in addition to social and ethical aspects, the law hardly addresses ecological aspects. A further point of criticism is the high level of bureaucracy that the law entails. There is a danger that companies will lose sight of the actual reason for the law - to improve the international human rights situation.

Conclusion & look to the future

The LkSG is a first step in the right direction. But to enable sustainable transformation in global supply chains, policymakers need to flesh it out in the coming years. While it may still seem like a major challenge, it offers companies the opportunity to future-proof themselves and their supply chains in a timely manner. Committing to analyzing the impact of measures and addressing their own supply chains offers the opportunity to make processes more sustainable and the ability to make fundamental improvements. In addition, reviewing effectiveness offers companies the chance to take up measures and grievance mechanisms and see how much has already been achieved.

But it is not only at the national level that things are moving with regard to legislation for global supply chains: a law on due diligence at the EU level will also soon come into force. This is because, similarly to the supply chain law initiative, more than 100 companies, investors and business associations recently issued a declaration in which they advocate for effective EU legislation on mandatory due diligence with regard to human rights and the environment.

The EU Sustainable Business Initiative will be published in the coming weeks. Part of it is to require companies to conduct human rights and environmental due diligence in their own operations and supply chains. So the first steps have been taken. Now it is up to each individual company not only to prepare for this legislation but to actively seize the opportunity to set a clear focus on human rights and the environment in their supply chains.

Lena Neumann