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Due Diligence Act: Challenges in implementation

On June 24, 2022, the VDMA in cooperation with ProduktionNRW invited to an information event around the Due Diligence Act. Anette Binder, consultant of the legal department at the VDMA, clearly presented the most important key points of the Due Diligence Act, which will apply from January 1, 2023.

Companies based in Germany will be required to comply with due diligence and reporting obligations with regard to respect for human rights in the supply chain. Companies based in Germany with 3,000 or more employees will be affected. From 2024, the law will also apply to German companies with 1,000 or more employees.

Companies will have to deal with the following implementation steps: adopting a policy on human rights strategy, establishing a risk management system, defining in-house responsibilities, through to due diligence processes such as developing preventive and remedial measures and introducing a complaints management system. The law also requires companies to report annual findings to the German Federal Office of Economics and Export Control (BAFA). This report is subsequently published online and is intended to disclose the implementation of the due diligence obligations.

Risk management in practice

A practical insight into the current challenges of risk management in dealing with the Due Diligence Act was provided by the Harting Technology Group, headquartered in Espelkamp. To analyze its supply chains and suppliers, the German manufacturer of industrial connectors, PCB connectors and system cabling uses databases such as the United Nations’ “Human Development Index” or Transparency International’s “Corruption Perception Index” as a basis for information. Country-specific indicators show in which countries there are risks with regard to human rights and the environment.

Collect and evaluate key figures

The next step in risk management involves supplier audits (surveys). Does the supplier have a code of conduct? Is there a corporate health and safety policy statement? Are there strategic goals for reducing energy consumption and preventing pollution? Once the metrics are established, a weighting needs to be determined with senior management. CSR key figures are currently given a significant weighting at Harting. Aspects such as the carbon footprint, recycling percentages or energy mix can determine how well or poorly a supplier or customer scores on points. The results are used for an overall strategic assessment. Harting’s conditions are then incorporated into supplier and customer contracts in order to communicate liabilities and requirements.

Awareness and schools

The preparation of a risk analysis is complex and particularly time-consuming for companies. As soon as concrete measures have to be derived and implemented, however, the real work begins. Suppliers who give no answers in the surveys or who have no or few activities in the supply chains receive a low score in the risk analysis. As a result, these suppliers require action to check for environmental pollution and human rights violations. Preventive measures include regional on-site training courses for suppliers to raise awareness, or renegotiation of contracts to the point of specifying expectations and setting deadlines.

Assistance from the VDMA

Harting uses, among other things, the existing risk management tool that the VDMA makes available to members. A cross-industry Code of Conduct is also available, which companies can use to create initial foundations for their supply chains. The VDMA’s Due Diligence Act starter kit can be requested by e-mail here from Judith Herzog-Kuballa, an officer in the VDMA’s Environment and Sustainability Department.

In the subsequent exchange of experiences, there were few queries. The participants confirm that the entire administration and risk management is a mammoth task.

More information

The event was offered by the VDMA in cooperation with ProduktionNRW. ProduktionNRW is the competence network of mechanical engineering and production technology in North Rhine-Westphalia and is implemented by VDMA NRW. ProduktionNRW sees itself as a platform for networking, informing and marketing companies, institutions and networks among themselves and along the value chain. Significant parts of the services provided by ProduktionNRW are funded by the European Regional Development Fund (ERDF).