Human Rights Regulations Increase Supply Chains

Human rights as a part of supply chain risk management has long been a consideration for companies seeking to ensure strong environmental, social, and governance (ESG) performance, avoid reputational blowback, and be good corporate citizens. Human rights in supply chains is more than a reputational risk, however, as mandatory human rights supply chain due diligence requirements become more widespread and there is increased focus from governments and investors alike on issues falling under the “S” in ESG.

Germany Adopts Mandatory Human Rights Due Diligence Regulation 

In 2011, the United Nations endorsed the Guiding Principles on Business and Human Rights, part of which envisioned supply chain due diligence laws requiring companies to take steps to monitor and assess the upstream human rights impacts in their supply chains.  Following in the footsteps of France, the Netherlands, and the UK, Germany recently enacted laws requiring companies to perform some level of supply chain due diligence.  

Germany’s Supply Chain Act, passed on March 3, 2021, will take effect in 2023 for companies of more than 3,000 employees, and will expand to cover companies of more than 1,000 employees in 2024. The German Federal Office of Economics and Export Control (Bundesamt fuer Wirtschaft und Ausfuhrkontrolle) is charged with the Act’s oversight. Under the Act, companies will be required to put in place adequate measures to: 

• Adopt a policy statement on their corporate human rights strategy
• Perform regular risk analysis and implement a risk management system to identify human rights abuses, including environmental harm
• Implement preventive measures to address identified risks of human rights abuses within the company and on the part of direct suppliers
• Take remedial action for identified human rights abuses
• Implement controls to mitigate risks of human rights abuses on the part of indirect suppliers
• Implement a grievance mechanism for reporting human rights violations
• Comply with documentation and annual reporting obligations

The Act states that appropriate measures may vary based on certain factors, including but not limited to the degree of influence the company has over the third party and the severity of the human rights impact. Companies that violate the Act could face significant fines and be banned from winning public contracts for a period of 3 years.  

Human Rights Abuses in Supply Chains are Both a Regulatory and Reputational Risk

Companies are experiencing growing pressure to be more proactive in identifying and rectifying human rights abuses within their supply chain, as calls for greater transparency and accountability grow louder. Allegations of human rights abuses in a company’s supply chain can lead to major public backlashes. Mandatory supply chain due diligence requirements mean that companies will now have to consider regulatory risk, in addition to reputational risk, when evaluating their supply chain risk management practices.

Given the level of scrutiny afforded supply chain sustainability from both regulators and investors, companies that are not already prioritizing monitoring supply chains for compliance with human rights standards should do so sooner rather than later.