Examining Germany's Potential Supply Chain Law

Thursday, October 8, 2020

Since the brunt of Corona-related legislation has passed, for the time being at least, the German government has re-directed its focus to the current term’s political agenda (which will end in September 2021).

On top of the list: a supply chain law, mandating companies to conduct human rights due diligence in their supply chains.

They would be required to do this beyond their tier 1, or in other words direct, suppliers. Already contentiously debated in the past year, it had fallen off the radar for a little while. Now it has re-entered the political stage with what seems to be even more potential conflict.

Some critics are asking — why now, in the midst of a global health and economic crisis, is there a push to put more regulatory strain on companies?

Before jumping into the discussion let’s take a step back, look briefly at the discussion thus far, and give another take on things.

What has happened so far?

In a nutshell: The discussion itself is not new. On a UN level, discussions on regulations of transnational businesses and their global supply chains started to emerge already in the 1970s.

In 2011, the UN Human Rights Council endorsed the Guiding Principles on Business and Human Rights (UNGPs). Those principles are the product of a six year consultation process between the public and private sector, as well as civil society. They rest on three pillars: the state’s duty to protect its citizens’ human rights; the company’s responsibility to respect relevant laws and regulations; and the right of victims of adverse human rights impacts to effective remedy.

Based on those principles, in 2016 Germany adopted its National Action Plan (NAP) on Business and Human Rights to realize the recommendations of the Guidelines.

The problem? Both the UNGPs and Germany’s NAP are entirely voluntary in nature.

In order to assess how seriously German companies were taking those recommendations, the coalition agreement of 2017 stipulated a survey, the result of which would determine whether the legislative process for a supply chain law would be put in motion.

German enterprises with more than 500 employees were asked to provide information regarding their human rights due diligence, as recommended in the NAP, by the end 2020. If by that time less than 50% had integrated the required steps in their operations, the Government would take legislative steps to make human rights due diligence mandatory under German law.

The results of the survey were rather sobering: In order to achieve the targeted response of 400 companies in the first place, the Ministry of the Economy (which was responsible for the survey) had to expand the sample from 1,800 to 3,000 companies. 2,600 companies never returned an answer.

Of those that did answer the survey, only 22% were found to satisfactorily meet the recommendations of the German NAP.

After these results, which clearly demonstrated that voluntary commitments are not enough, the government agreed that a law was inevitable.

Who is drafting the law?

Three ministries are involved in drafting the law. The Ministry of Economic Cooperation and Development, whose Minister, Gerd Müller, has been the main promoter of such a law for quite some time already (the ministry’s first draft for such a law was already leaked in February 2019). The others are the Ministry for Labor and Social Affairs, and the Ministry of the Economy. As might be expected, the latter has been the most vocal critic, warning of the potential negative impact on Germany’s economy, especially now in the midst of Covid-19 recovery.

Recently, the Ministry for the Environment has tried to enter the discussion, demanding that environmental aspects also be considered. In principle however, support for the law runs through all governing parties, and Chancellor Merkel endorsed it as recently as July 2020.

According to a recent poll, about 75% of the German population favor such a supply chain law. 76% of respondents were of the opinion that victims of human rights abuses in supply chains should be able to sue for remedy in German courts.

What would be in it?

The drafts are still in the process of being aligned and discussed internally between the three involved ministries. Therefore, the contents of the bill that will be presented to parliament are not clear yet. What is more evident, are the demands of the groups lobbying for and against the law.

The Initiative Lieferkettengesetz (Supply Chain Law Initiative) is an association of more than 80 civil society organizations, labor unions, and church groups advocating for a law that includes the UNGPs as a minimum standard. Specifically, they demand:

  • Audits to verify compliance with the law, and sanctions in case of violations
  • The inclusion of environmental protection, and recognition of the interconnectedness between the environment and human rights
  • Liability of the companies in cases of negligence, and the possibility of civil action before German courts for the victims of human rights violations in supply chains abroad
  • The application of the law to companies with more than 250 employees

Industry Associations, however, are wary. Especially of the burden this would inflict on smaller companies, and most importantly, the risks associated with a liability clause.

In a joint press release, three of Germany’s biggest industry and employer associations recently warned about the implications of such a law, both for individual companies and the German economy as a whole. Ideas floated in that camp include applying the law to companies with more than 5,000 employees and avoiding liability.

Others argue that such a law only makes sense on a European Union level, as it would otherwise put German companies at a disadvantage. Already in April, the EU Justice Commissioner committed to presenting a draft for an EU-wide supply chain law in 2021. What’s more, Germany is currently presiding over the Council of the European Union and has put the topic on the agenda as well.

The concerns don’t go unnoticed, as Minister Müller assured that there will be transition periods to allow for enough time to adapt to the law and that initially, only bigger companies who are used to such processes will be covered. He also admonished companies to take this issue seriously:

“Nobody can tell me that in times of digitalization and blockchain technology you cannot have an eye on your supply chain. Most companies are already a step ahead of their [industry] associations.”

Spinning the Narrative

What makes the discussion around this law so fascinating? The fact that the line between those supporting and rejecting it does not run between companies and civil society.

In December 2019, the Initiative Lieferkettengesetz announced that 42 companies had joined ranks to advocate for such a law. Among them are the likes of Tchibo, Nestlé, and the REWE Group.

Their rationale: a law would create a level-playing field, where all companies are conducting business along the same standards, as opposed to today’s plethora of guidelines and norms that companies can pick from. Not doing due diligence would no longer be an option.

Moreover, many of the companies supporting the initiative are thoroughly evaluating their supply chains already and are putting programs into action on the ground to support their suppliers in improving their employees’ lives.

Recently, on September 21st, the labor union Verdi hosted a panel discussion on the topic, chaired by the deputy director of the German Institute for Human Rights. Among the panelists were representatives of Tchibo, the Ministry for Labor and Social Affairs, the Initiative Lieferkettengesetz, as well as a professor of public and international law.

Nina Richter, Tchibo’s head of human rights insisted on a change of narrative. This law, in her opinion, is necessary. But it shouldn’t come as a mechanism to punish companies who fail to carry out their due diligence. What it should do is to encourage companies to look into their supply chains, work with their suppliers, engage the workers, and help to improve peoples’ lives. This sort of impact, as opposed to mere reporting, should be the point of the law.

“The people need to benefit. And people don’t necessarily benefit from an audit….companies need to be creative when they engage with their supply chains, as creative as they are with their products.”

Other panelists supported this way of looking at things, emphasizing not the punishing character of a law, but its potential to push companies to find new ways to engage with their value chains. Essentially to add value, not only to the materials processed along the way, but also to the lives of the people working on them.

Johanna Kusch, spokesperson for the Initiative Lieferkettengesetz emphasized:

“Companies don’t have to guarantee anything, but they have to make an effort to assure responsible behavior along the supply chain. We are not talking about whether a chauffeur has buckled up, but serious human rights abuses.”

For supply chain negligence, liability might be the only option, as Markus Krajewski, Professor of international and public law, pointed out:

“The way a law is sanctioned sends a signal. If it’s a fine, the signal will not be very strong. And if we have a German law, it should fit within the German legal system. This system usually stipulates that there is liability for inflicted damage.”

And for those breaches, audits might indeed not be enough. For example, when trying to ensure there is no child labor at a factory — children can be sent to school the day the auditor has announced the inspection, and be taken back to work the day after. Thorough stakeholder engagement seems to be the more appropriate answer.

“What we want is a change of culture. Right now, social and environmental standards are seen as harmful for companies — this has to change,”

Susanne Gasde emphasized, Head of the CSR Unit in the Ministry for Labor and Social Affairs. So, not only should there be an obligation to report on due diligence, but a standard for overall business conduct is needed. One in which efforts to uphold human rights are treated as a key element.

What’s next?

For the moment it seems like the process has stalled. The three Ministries are still negotiating key points and have dug into their positions, particularly around companies’ liability for human rights abuses.

This question will likely decide the fate of the entire law — both its existence and its effectiveness. The proponents are set to pass a law before September 2021, as stipulated in the government’s coalition agreement. The schedule beyond that point is uncertain though: before being discussed in parliament, the federal cabinet (the Chancellor and the fifteen ministers) have to formally approve the draft — a step that was due to happen on the 10th of September but was postponed on short notice. So far, it is not clear until when.

Outside Germany’s executive branch, things are developing at a different speed. On Tuesday and Wednesday of this week, the Labor Ministry hosted an international conference titled “Global Supply Chains — Global Responsibility” in the city of Potsdam, just outside Berlin. Speakers included the Head of the ILO, European Commissioners, Ministers from several EU countries, and executives of multiple companies — however, the industry associations that are opposed to the law did not participate. On the second day, the EU Justice Commissioner announced that he would start consultations regarding an EU law in the upcoming weeks. The pressure is mounting for the government to proceed and pass a bill to parliament.

In any case, the process has reached a point where there is little chance of returning to business as usual — the question remaining is what exactly the road ahead will look like for companies, regulators, and the countless people working in international supply chains.

At the end of the day, it seems we will wait with bated breath for a decision sometime between now and September 2021.

- ABOUT THE AUTHOR

Christian Ecker

Christian is a Project Manager for Minespider, focusing on lead traceability in Volkswagen's supply chains. He has a keen interest in local-level human rights & environmental impacts and holds a Master's in International Affairs from the Hertie School of Governance. In his free time, you'll find him hiking or playing handball.

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