Rethinking Global Supply Chains

The year of the tiger, according to traditional belief, is all about embracing changes. The third animal in the Chinese zodiac, the tiger is thought to embody bravery, competitiveness, and strong willpower, but also a spirit of adventure and propensity towards risk. For corporate decision-makers, applying at least some of these attributes in the world of business may prove useful in the coming twelve months, as internationally operating companies will need to transform and adapt to significant changes in the regulatory environment.

New and upcoming pieces of legislation such as the German Act on Corporate Due Diligence in Supply Chains and the proposed EU framework on sustainable corporate governance lay out complex sets of requirements, with practical implications for companies along their entire global value chains – and a limited timeframe for implementation. German companies with sourcing operations in Hong Kong and supplier networks across China and the Asia-Pacific region should therefore put the issue of sustainability high on the agenda and take proactive measures to ensure compliance.

New Regulations on the Horizon

The Lieferkettensorgfaltspflichtengesetz (Supply Chain Due Diligence Act, SCDDA), informally known as the ‘German supply chain law,’ was adopted by the Bundestag in June 2021, following a lengthy process of consultations and debates that involved multiple stakeholder groups, from federal ministries to industry bodies to civil society organisations. The legislative initiative takes inspiration from the United Nations’ Guiding Principles on Business and Human Rights first published in June 2011, as well as the National Action Plan (NAP) later adopted by the German Federal Government in December 2016. In 2018, the government’s coalition agreement stipulated that a legal framework would become necessary if the NAP’s goals were not reached by 2020 based on voluntary self-commitment from companies alone. The official announcement of the forthcoming supply chain law followed in July 2020.

The SCDDA aims to protect human rights and environmental protection standards in global supply chains, targeting violations thereof such as forced labour, discrimination, as well as environmental destruction and contamination. The SCDDA will take effect in two phases: Starting from 1 January 2023, the law will initially cover companies operating in Germany with a global headcount of 3,000 employees or more. A year later, from 1 January 2024 onwards, the threshold will be lowered to 1,000 employees worldwide. Notably, the SCDDA will not only apply for German companies, but also for foreign entities with a subsidiary or branch office in Germany.

Under the SCDDA, companies will be required to establish a transparent and accessible grievance mechanism that enables people, who have either been directly affected by or hold relevant information about company activities that are possibly in violation of human rights or environmental protection standards, to report these accordingly. Moreover, companies will be obligated to publish an annual report on their due diligence performance, including details on the complaints received and measures taken in response.

While the legislative initiative was largely driven by the Federal Ministry for Labour and Social Affairs (BMAS) and the Federal Ministry for Economic Cooperation and Development (BMZ), SCDDA compliance will be monitored by the Federal Office for Economic Affairs and Export Control (BAFA), a subordinate authority of the Federal Ministry for Economic Affairs and Climate Action (BMWK). The BAFA will review the mandatory company reports, process complaints, and impose sanctions in cases of non-compliance. Serious legal violations may be subject to fines of up to 2% of a company's average annual global turnover (for companies with an average annual turnover of over EUR 400 million) [Art.1, S.6, C.24] and the exclusion from public tenders for up to three years [Art.1, S.5, C.22].

While the new regulatory framework already carries considerable implications for companies in Germany and their suppliers around the world, more is yet to come: An EU-wide directive on sustainable corporate governance has been in the works for some years, and the European Commission is expected to finally publish a proposal within the coming days. In a similar vein to the German initiative, the directive will mandate companies to monitor, assess, and rectify negative human rights and environmental impacts in their supply chains, with an aim to “enable companies to focus on long-term sustainable value creation rather than short-term benefits.”

Preparation is the Key to Success

The key to successful preparation for the forthcoming changes in the regulatory landscape lies in the timely and thorough information and education of staff and business partners alike.

Corporate due diligence is certainly not a new concept for most internationally operating companies. Many of them, especially large multinationals, have long established their own CSR and social compliance programmes in their global supplier markets, in some cases even going beyond existing legal obligations. Nevertheless, the new SCDDA and EU framework will likely require many companies to rethink their supply chain management approach and make a few critical adjustments.

The German law explicitly demands that companies designate a responsible person or persons within the enterprise who will be in charge of implementing due diligence in the supply chain and managing related human rights and environmental risks. In order to fulfil this requirement, companies may, for instance, appoint a human rights officer (Menschenrechtsbeauftragte/r) [Art.1, S.2, C.4(3)]. To an extent, this role is comparable in nature to the Data Protection Officer under the EU’s General Data Protection Regulation. Furthermore, the supply chain law states that executive management must obtain a work report from the designated employee at least once per year.

Hence, companies will need to make sure they have well-educated professionals in the area of sustainability in their own ranks. In order to support companies in adapting to these requirements, GIC Hong Kong has partnered up with Consulting Service International (CSI) and htw saar University of Applied Sciences to present a brand-new sustainability management course. As the first of its kind, the course was specifically designed to equip participants with the practical knowledge to implement sustainable practices and reduce risks along the entire supply chain.

Over the course of 7 weeks, participants gain an in-depth understanding of due diligence requirements and how to apply them in the real world. The programme covers a variety of relevant aspects, including social, environmental, health, policy, and legal issues, in an intuitive way that will enable participants to employ best practices to the mutual benefit of communities, companies, and the global environment. Upon successful completion, course participants will receive a certificate in sustainability management, and will be able to help their companies navigate an increasingly complex regulatory environment to ensure sustainable and future-proof business operations.

“The practical focus of the course allows participants to directly apply sustainability in their respective industry. Thanks to the flexible teaching modes, the course can easily be taught to participants around the globe,” said Karl Borgschulze, Managing Director of CSI. The first course will be taught in German language starting from 22 February 2022, with additional course dates in English language to be added in the upcoming months.

With the effective date of the SCDDA less than a year away and further legislation already in the pipeline, companies ought to take decisive action now and ensure the right measures are put in place ahead of time. Sustainability education is an important key to getting prepared for the impending paradigm shift in global sourcing and setting the course for a sustainable future.

By Hendrik Hillebrecht