The corona pandemic has highlighted international supply chains and made many aspects of a globally networked economy more visible. “The pandemic has put supply chains worldwide under pressure. That made many people realize how internationally interdependent the economy is now and how vulnerable supply chains can be, ”says Daniel Weiß from the German think tank adelphiwho has been dealing with the topic of sustainable supply chain management for many years. It is about much more than just availability, adherence to deadlines and quality: whether wage payments are missing for textile workers in Bangladesh, the deforestation of tropical forests for palm oil production in Indonesia or child and forced labor on cocoa plantations in Ghana - there are quite a few things that happen globally Value chains can go wrong.

Supply chain laws: the ball gets rolling

The discussion about how humane working conditions and the responsible use of environmental resources can also be guaranteed in globally branching value chains has been going on intensively for decades. It was and is essentially a deadlocked debate about self-commitment - soft law - versus statutory regulation - hard law. In 2011 the international community agreed in the United Nations Human Rights Council on the so-called Guiding principles for business and human rights. For the first time, these established a - legally non-binding - orientation framework for a due diligence check with regard to the respect of human rights by companies. And they were together with them OECD Guidelines for Multinational Enterprises Starting point for many of the further, more and more binding developments.

The first legal norms followed with a focus on reporting obligations such as the California Transparency in Supply Chains Act and the Dodd-Frank Act 2012 in the USA as well as the EU directive on non-financial reporting in 2014. The latter was established in Austria by the Sustainability and Diversity Improvement Act 2017 implemented in domestic law. Since then, around 120 large Austrian companies have had to refer to environmental, social and employee issues, respect for human rights and the fight against corruption in their annual reports. And anyone who does business in the UK has to submit an annual report on their actions to combat slavery and human trafficking since the UK Modern Slavery Act 2015 was passed.

It quickly became clear that words do not necessarily follow actions. The enactment of the “Loi sur le devoir de vigilance” in France in 2017 marked the beginning of a new wave of laws that not only prescribe reporting but also robust due diligence processes. The Loi de vigilance obliges large French companies to draw up, publish and implement a comprehensive monitoring plan for risks of serious violations of human rights, human health and safety and environmental damage throughout the supply chain. A Dutch law passed in 2019, Wet Zorgplicht Kinderarbeid, also urges companies to conduct a due diligence check with regard to child labor in their supply chains. And the EU Conflict Minerals Regulation, which has been in force since the beginning of 2021, also imposes due diligence on importers of certain metals such as tin, gold, tantalum and tungsten in order to prevent their trade from financing armed conflicts.

From soft law to hard law

The human rights regulation of the economy is basically nothing new. But it has clearly picked up speed: Many of the new regulations not only impose reporting obligations on companies, but also specific human rights and environmental due diligence processes.

Supply chain law timeline

Current dynamics on the subject of supply chain laws

The year 2021 could now go down in history as the year when soft law finally becomes hard law in relation to the supply chain. "What we are currently seeing is increasing concretization and legalization, but also more clarity and increasing consumer expectations for transparent and sustainable supply chains," said Weiß. Ten years after the adoption of the UN Guiding Principles on Business and Human Rights, the German federal government has decided on the Draft of a due diligence law agreed that should be passed by the Bundestag in June. The background: The monitoring for the voluntary implementation of the German National Action Plan for Business and Human Rights by German companies was provided sobering results, less than 20 percent of the companies implemented corresponding measures. From 2023, large German companies will have to pay more attention to compliance with human rights and environmental standards in their supply chains. Violations can result in fines of 100.000 to 800.000 euros, depending on the offense.

The topic is also picking up speed at EU level: the European Parliament passed one on March 10th Motion for a resolution with recommendations to the Commission for binding rules on corporate due diligence. The impetus for this was provided by the results of a study commissioned by the EU Commission in 2018, which showed that in a voluntary system only every third European company checks its global supply chains with a view to human rights and environmental impacts. "The EU study has also shown that many companies are now looking forward to a uniform supply chain regulation at EU level: no less than 70 percent of companies are in favor of such a level playing field," says Iris Hammerschmid from the business law firm Freshfields Bruckhaus Deringer.

"Many companies are positive about uniform supply chain regulation at EU level."
Iris Hammerschmid, Freshfields Bruckhaus Deringer
Iris Hammerschmid
Freshfields Bruckhaus Deringer

In particular, companies that operate across industries and countries are now confronted with a wide variety of sustainability and due diligence obligations as well as heterogeneous national legal provisions. Some Austrian companies are also affected by existing supply chain laws and legislative initiatives: "The French law, for example, may have an impact on group-wide compliance programs for Austrian group companies, and the Dutch legal regulation will also apply to all Austrian companies that are expected to come into force in 2022 Deliver products to Dutch end customers or provide services in the Netherlands, ”says Hammerschmid.

The steadily growing patchwork of different national regulations is to be replaced soon: Before the summer, the EU Commission wants to present a legislative proposal on this subject, which should create the same conditions for all companies operating in the EU. The EU Parliament's motion for a resolution suggests that an upcoming EU directive on the due diligence and accountability of companies will be ambitious. EU Justice Commissioner Didier Reynders himself likes to emphasize that the Commission's draft will have “more teeth” than, for example, the planned German Due Diligence Act.

An alliance of civil society organizations and employee representatives that is currently campaigning for a supply chain law in Austria is also hoping for more teeth. Iris Hammerschmid considers it unlikely that the Austrian federal government will follow the German example in this regard, despite the commitment in the turquoise-green government program to “examine additional measures to strengthen corporate responsibility for human rights in the sense of the OECD guidelines for multinational companies”. “In Austria they will probably wait for the Commission proposal. At the latest when the EU directive is passed, Austria must also deal with it and implement it in national law, ”says Hammerschmid.

Interview with Michaela Schmiedchen, KPMG

Michaela Schmiedchen, KPMG

Human rights are not a marginal issue.

Michaela Schmiedchen, Senior Manager in the Sustainability Services department at KPMG, sees a lot of room for improvement when domestic companies are addressing the issue of human rights.

Time for action

One thing is clear: It is high time that Austrian companies also examine their supply chains. For Michaela Schmiedchen, Senior Manager in the Sustainability Services division at KPMG, this urgency has not yet sufficiently arrived in this country (see Interview). “Awareness of the range of human rights must be heightened. In my opinion, a structured discussion of the potential effects on the rights of stakeholder groups is still too seldom, ”said Schmiedchen.

Although companies are feeling increasing pressure even without legal regulation: "Sustainability criteria are increasingly moving into the center of investor decisions and customers and business partners also increasingly expect sustainability and transparency," emphasizes Iris Hammerschmid. In any case, she considers early measures to be appropriate, also for purely practical reasons: "One must not forget that supply contracts often run for many years and it can be difficult to renegotiate mandatory minimum standards and audits."

But how far does the responsibility of companies for compliance with minimum standards in their supply chains extend? According to the UN Guiding Principles, companies are fundamentally responsible for their entire supply chain - from the extraction of raw materials to the finished product. In practice, however, they are not automatically liable for any grievances. While the planned German Due Diligence Act does not provide for any liability regulation for the time being and elements of human rights due diligence only extend to companies themselves and their direct suppliers, the EU legislative initiative would like to go further. Nevertheless, there should be no general liability, companies should rather look for their own connection to negative effects and prove that appropriate processes have been set up to address them.

Sustainable supply chain management: a topic for everyone

Anyone who thinks this is purely an issue for large corporations is wrong. Many of the existing regulations primarily oblige larger companies - nevertheless, small and medium-sized companies will also be required. “Many SMEs are suppliers to large companies that are already subject to sustainability requirements. In the future, they too will have to demonstrate even more clearly how they deal with human rights and environmental challenges in their supply chain, ”emphasizes Daniel Weiß. The keyword is: appropriateness. After all, companies of all sizes can best meet legal and social requirements - regardless of whether they are purely reporting or mandatory due diligence - by setting up robust due diligence processes.

But what can or must companies do to ensure that basic standards are adhered to along their supply chains? At the beginning of a due diligence process, in addition to a declaration of principle on respect for human rights, there is usually a detailed analysis of all risks along the value chain. “Especially at the beginning it is difficult to get an overview of the entire supply chain. A simplified representation in the form of a matrix can be helpful to record the central supply chain stages, processes and countries of delivery. This allows SMEs to get an initial overview of risks, ”advises Daniel Weiß, referring to helpful portals such as the online tool SME compass and the German helpdesk for business and human rights, which offers free training and the so-called CSR risk check Provides information about supply chain risks.

"Human rights and environmental issues are often closely linked."
Daniel Weiss, adelphi
Daniel White
adelphi
Weiß also recommends a step-by-step approach to an integrative approach that takes a holistic view of and addresses human rights and environmental risks. Because both the French and German Due Diligence Act and the planned EU supply chain regulation go in this direction - which makes perfect sense: “Often,” says Weiß, “human rights and environmental issues are closely linked. An example from the textile industry: chemicals that are used in dyeing are not only hazardous to health, but also pollute the environment if they end up in rivers if untreated. If the use of chemicals is addressed holistically, improvements for both human rights and environmental protection can be achieved. ”Responsible design of supply chains creates resilience to risks, which not only protects suppliers and workers in upstream value creation processes, but also the company brings stability and security at the end of the supply chain, says Weiß. And he calls for a change of perspective: "Away from the pure focus on risks for one's own company such as reputational risks or production downtimes and towards the perspective of those who are potentially affected."
Mammoth task: At the beginning of electronics or automotive supply chains there is often the labor-intensive extraction of raw materials. Tracking down to the last link in the chain is very challenging. In the picture: a copper mine in the south of the Democratic Republic of the Congo (© Fairphone, License: CC BY-NC 4.0)

Bundling forces for more effect

Weiß also sees a major role for industry associations and initiatives in the implementation of entrepreneurial diligence. “Exchanging information only with direct suppliers will not be enough to address the central challenges in supply chains. The cooperation in the industry association or in cross-industry business associations can lead to a greater collective leverage effect, which is needed for many structural problems in supply chains, ”says Weiß. This basic idea is also followed by the sector-specific recommendations of the OECD, which, with its guidelines for different industries, wants to show how industry-specific practical steps can be derived from the technical concept of human rights and environmental due diligence.

In addition, industry initiatives are important knowledge carriers who can develop industry risk analyzes, set up complaint mechanisms or offer training. One example of this is the Drive Sustainability Initiative, in which eleven car manufacturers (including the Volkswagen Group, Daimler and BMW) are working on innovative approaches to make procurement and thus the entire automotive supply chain more sustainable. Precise tracking down to the last corner of the supply chain is a mammoth task, especially for sectors such as the automotive industry, where a large part of the added value occurs in upstream production stages and whose supply chains include tens of thousands of suppliers around the world.

But even if the cooperation in the industry association brings advantages, the risk responsibility ultimately remains with the individual company. How far this responsibility actually goes from a legal point of view will finally become clearer with the upcoming uniform EU regulation. This is an important step to ensure that the topic reaches the reality of most companies and that effective measures are taken towards sustainable supply chains.

Photos: Marcel Crozet / ILO (License: CC BY-NC 2.0), Freshfields, Daniel Weiß, KPMG, Fairphone (License: CC BY-NC 2.0)