Due diligence in supply chains: from nice-to-have to legal obligation

The German supply chain act is a step forward, and the ongoing negotiations on a European equivalent also offer some hope for greater protection of human rights, the climate and the environment. These laws alone will not suffice make the extractive sector truly fairer and more sustainable, however.

Illustration zum Lieferkettengesetz: Personen untersuchen das neue Gesetz

With pun-filled slogans in German (no, not necessarily a contradiction in terms), Initiative Lieferkettengesetz, an alliance of over 100 civil society organizations, campaigned for a German supply chain act since 2019. Many thought it would never see the light of day, but in January 2023, the German Act on Corporate Due Diligence Obligations in Supply Chains (LkSG) came into force. It regulates due-diligence obligations with regard to human rights in global supply chains for companies above a certain size. Since then, paying attention to human-rights issues in supply chains is no longer just a corporate nice-to-have. Even though Initiative Lieferkettengesetz and its fellow campaigners had to make many compromises along the way, the act is an important shift in paradigm.

History of supply-chain due diligence and the basic principle of the German law

The fact that companies were able to rake in enormous profits with the production of cell phones, for example, while at the same time financing conflicts, had long left a sour taste in many consumers’ mouths and been denounced by various NGOs. The pressure to act became apparent in numerous other sectors as well. Negotiations at the UN level to establish standards for transnational corporations and thereby assign them responsibility under international law had failed, however, making supply-chain due diligence a voluntary affair under the header of «corporate social responsibility».

For the mining sector, this meant that instead of having to prevent negative impacts, companies could largely decide by themselves which social benefits they wanted to provide to local communities. In other words: how much they thought they had to spend to minimize conflicts on the ground. So they built schools, created short-term jobs and negotiated with the locals how much they would pay them for the consequential damage mining did to their land and property. This was meant to deflect attention from the negative impacts of mining operations instead of limiting or even preventing them. Similarly, responsibility along supply chains was not recognized for a long time.

In 2011, John Ruggie, Special Representative of the UN Secretary-General, presented the UN Guiding Principles on Business and Human Rights, which applied the well-known principle of corporate due diligence to respect for human rights and described the essential steps for its implementation. This laid the foundation for the supply chain act. The OECD included human-rights due diligence obligations for corporations in the next version of its existing guidelines on responsible business conduct as well. Ruggie also suggested that all countries develop business and human rights action plans, setting out how they would fulfil their protective obligations. Affected parties were to be granted access to legal remedies (although this part was rather weakly worded).

The German supply chain act – the compromise at the end of a long negotiation process

In 2013, several thousand people died in a factory fire in Bangladesh. There was no legal basis for holding Kik, a German company and one of the clients of the textile factory, responsible in any way. In 2019, a mining dam collapsed in Brumadinho, a municipality in Brazil, killing several hundred people. Only shortly before, the German certification company TüV Süd had declared the dam to be safe. While iron ore from Brazil continues to arrive in Germany, those affected are still waiting for justice and compensation. At the same time, official monitoring by the German government revealed that only one-fifth of German companies had adequately implemented the voluntary due diligence requirements placed on them. All of this – helped by the campaigning by Initiative Lieferkettengesetz – increased the pressure on policymakers to establish rules.

Eine Luftaufnahme von einer Fabrik, vor der eine Schlange Lieferwagen stehen

The German supply chain act is the compromise at the end of a long process of negotiations. Since January 1, 2023, German companies with more than 3,000 employees must, among other things, review their global value chains, prevent risks, take appropriate measures and report on them. As of January 1, 2024, these obligations will apply to companies with 1,000 employees or more. While the UN Guiding Principles envision a risk assessment along the entire supply chain, the German supply chain act only stipulates regular assessment for the company’s own business area and its direct suppliers. A company only has to review the entire supply chain and prevent risks if it has «substantiated knowledge» of a human rights risk. How «substantiated knowledge» is defined, however, will still have to be decided by means of legal interpretation. Many had hoped for more in terms of the provisions on access to legal remedies for those adversely affected, with respect to the size of the companies subject to the act, as well as with regard to the scope of application. Some also criticize that the act allows companies to avoid penalties without actually addressing human rights risks in a sustainable manner.

Many eyes are on the European supply chain act

There already is other legislation in place to limit the negative impacts of mining, such as the European Union Conflict Minerals Regulation and the Batteries Regulation which was passed in the European Parliament earlier this year. However, they are either limited – as in the case of conflict minerals –- to very specific human rights violations such as the worst forms of child and forced labor and the financing of conflicts, or they refer only to a specific product. Much hope is now pinned on the European version of the supply chain act, the EU’s Corporate Sustainability Due Diligence Directive. Its draft was presented by the European Commission in March 2022 and is currently in the trilogue phase, that is, negotiations between the European Parliament, the Commission and the Council of Ministers.

Hope for the climate and the environment? Will the financial sector be held accountable?

The Corporate Sustainability Due Diligence Directive has been proposed as part of the European Green Deal and thus sets requirements for companies with regard to the climate and the environment. The negotiators have yet to decide, however, how effective the legal provisions in this regard will actually be. But it is precisely the duty to pay attention to the environmental consequences of mining that can make a significant positive difference when it comes to protecting health and preventing human rights violations. The financial sector must also be held accountable, since it can have important leverage in the mining sector, among others, as large sums are needed to open a mine. European manufacturers and suppliers of heavy mining equipment should also be required to insist that mine operators comply with minimum human rights and environmental standards. One topic that is still hotly debated is certification. While some, such as the German Free Democratic Party (FDP) in particular, want legislation at the EU level to allow responsibility to be outsourced to certification companies, many civil society organizations are strictly opposed to the idea. They fear that this would massively weaken the impact of the law.

An important paradigm shift – but by no means sufficient

In comparison to the German supply chain act, the EU’s Corporate Sustainability Due Diligence Directive is expected to be a further step forward with regard to the respect of human rights and hopefully also the protection of the environment and the climate. How effective it is going to be will depend on more than just the ongoing negotiations, however. There will have to be verification and monitoring of the implementation. Close observation of the impact in the mining countries and potential amendments of the act will be of critical importance. In the course of the adoption of a European directive for a supply chain law, the German act will also have to be adapted. The access to legal remedies for those adversely affected, in particular, is still unlikely to be sufficiently guaranteed by the EU proposal.

Supply-chain legislation on due-diligence basis is an important shift in paradigm but it alone will not be enough. We would also need a ban on mining in areas that are essential for species conservation or water supply, and a fairer trade policy to help make the extractive sector fairer and more sustainable.

Johanna Sydow heads the International Environmental Policy Division at the Heinrich Bell Foundation. Her fieldwork on mining in Ghana, Peru and Ecuador (2009-2013) turned her into an advocate for the reduction of raw materials consumption and for binding rules for companies.

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