On 16 July 2021, the German Bundestag adopted the Act on Corporate Due Diligence Obligations in Supply Chains (referred to as the LkSG or the Act). The purpose of the Act is to ensure that German companies act responsibly, at a global level, with regard to human rights and the environment in the course of their increasingly intensive international trade. In globalising economic relations, Germany has imposed on companies established in its own territory the responsibility of preventing the exploitation of workers and of acting in an environmentally conscious manner not only in its own country but wherever in the world they may be. Through this regulation, under the heading of due diligence, companies have been given monitoring, auditing, and remediation obligations, the details of which we will see below.
The legal basis and the reach of the Act
Section 276, paragraphs 1 and 2, of the German Civil Code (BGB) set the general standard of care. However, the scope of the Act has been kept very broad.
Why Germany legislated: the explanatory memorandum
As stated in the Act’s explanatory memorandum, Germany is concerned that, at a time when economic relations have acquired a widespread international character and the aim of making a profit has come to the fore, German companies may act negligently with regard to universal human rights. Under the 2030 vision, it is hoped that German companies will achieve sustainable social development by assuming the duties of ensuring a decent life and protecting the environment in every country in which they do business and trade. This law also lays bare the point that the social state governed by the rule of law has reached. Proceeding from the principle that “the protection of human rights and the environment is universal”, the objective of socialising working conditions and making them bearable, even though it imposes additional burdens on companies and the German government, reflects a lofty ideal. On one side of the realisation of this ideal stand the economically more powerful purchasing companies, and on the other side the suppliers. Another feature of the Act in this regard is that it has laid down mechanisms capable of imposing obligations on suppliers as well.
“Producing and selling goods no matter what” will give way to “producing and selling in the light of the principles of the social market economy, observing the universal rights of workers and without harming the environment”. Below, we will address in detail the instruments and control mechanisms envisaged in the Act to ensure this.
How the Act reaches suppliers outside Germany
In the Act’s explanatory memorandum, it is set out that the purpose and objective of the Act are the United Nations Guiding Principles on Business and Human Rights (2011). The due diligence obligation to act in accordance with universal human rights and to protect the environment, which the Act sets as a goal for German companies, turns — once one goes beyond Germany’s borders — into an obligation to monitor and audit suppliers. We can therefore say that, although the Act cannot be applied outside Germany’s borders, it aims to carry its effect across borders and to bring about a sustainable social market in international trade. Suppliers established outside Germany are brought within the Act’s sphere of effect, if not directly, then indirectly. This matter, too, will be addressed in detail below. Let us confine ourselves here to saying this: suppliers that do not comply with the purpose of the Act will face the risk of being pushed out of commercial life, because the purchasing or ordering companies will be confronted with very large financial sanctions in their own countries. This situation, which will cause their economic reason for existence to disappear, will compel suppliers, too, to comply with universal human rights and the protection of the environment. Indeed, since the Act also covers the supplier’s sub-suppliers (intermediate suppliers), all companies within the supply chain will audit one another’s sensitivity to human rights and the environment, and the due diligence obligation introduced in principle for German companies under the Act will thus be spread over broad areas. In this way, Germany aims to create a sustainable social life and environmental awareness throughout the world.
The Act’s central concept: the due diligence obligation
The Act’s central concept is the due diligence obligation. It is around the due diligence obligation that the Act regulates which conditions companies must fulfil, which audits are to be carried out, and which consequences will arise if they are not.
Developments at European Union level
Before we begin examining the details of all this, let us mention that there are legislative efforts on this subject in the European Union as well. We will touch on these efforts under each topic heading as appropriate.
