The German government introduced the Supply Chain Sourcing Obligations Act (LkSG) to protect the environment and human rights. Starting January 1, 2023, the law will enter into force in stages with far-reaching effects. Numerous human rights and environmental due diligence obligations are referred to, non-compliance with which can result in particular in coercive measures and fines – there is also the threat of exclusion from public procurement procedures.
Medium-sized and smaller companies in the mechanical and plant engineering sector are not directly affected by the due diligence requirements under the Act. However, they will be indirectly affected if their customers make an appropriate supplier selection in accordance with the Act and transfer obligations to them as components of the supply chain. ProduktionNRW has organized a virtual information event for the mechanical and plant engineering industry in NRW on May 4, 2022, to classify the effects of the law from a legal perspective.
The German supply chain law
After a classification of VDMA activities and support regarding the Supply Chain Act by Anette Binder, attorney at VDMA Legal, Dr. Bastian Mehle and Volker Herrmann, both attorneys at Orth Kluth Rechtsanwälte PartG mbB, went into detail about the Supply Chain Due Diligence Act.
The scope of the law has a territorial reference to Germany and affects companies with at least 3,000 employees from January 1, 2023, and companies with at least 1,000 employees from January 1, 2024. All of a company’s products and services with the associated production steps in Germany and abroad that are required to manufacture the products or provide the service are considered in the supply chain.
Impact on medium-sized companies in the mechanical and plant engineering sector
Dr. Bastian Mehle and Volker Herrmann further emphasized that if a company falls outside the scope of the law but is a direct supplier to affected companies, then these smaller companies in the supply chain may furthermore be required to implement due diligence requirements through their contractual relationship.
In order to anticipate this challenge, small and medium-sized enterprises should prepare for the changed framework and assess the extent to which they can efficiently meet the requirements imposed on them by their employees (such asIn order to anticipate the challenge, small and medium-sized companies should prepare themselves for the changed framework conditions and examine the extent to which they can efficiently implement the requirements imposed on them by their employees (such as signing a supplier code of conduct or including corresponding obligations in contracts) as well as the resulting more extensive auditing obligations – such as the introduction of control mechanisms in their business area and at – again – their suppliers. In this respect, it is advisable to address the adaptation of structures within the company (such as the designation of a central contact person within the company), the performance of risk analyses, and the adaptation of the company’s own supply chain through appropriate contracts.
Draft directive for a European supply chain law
In addition to the German law, the European Commission presented a draft “Directive on corporate due diligence in the area of sustainability” on February 23, 2022. The Commission’s draft directive is now in the legislative process of the European Union. A final decision is expected by around 2023/2024.
In contrast to the German law, the scope of application is defined more broadly. It covers, for example, companies with at least 500 employees and 150 million euros in annual sales, as well as companies with at least 250 employees and 40 million euros in annual sales if they are predominantly active in a “risk industry” (such as textiles or the manufacture of metal products (excluding machinery and equipment)).
In the concluding discussion, it became apparent that many participants did not know whether their companies would be directly affected by the impact of the German law. Particularly in view of European developments, it is advisable to take precautions at an early stage and to position oneself within the company in line with the legal implications.
The event is offered by ProduktionNRW. ProduktionNRW is the competence network for mechanical engineering and production technology in North Rhine-Westphalia and is run by VDMA NRW. ProduktionNRW sees itself as a platform to connect, inform and market companies, institutions and networks among each other and along the value chain. Significant parts of the services provided by ProduktionNRW are funded by the European Regional Development Fund (ERDF).