Update: German government approves draft Due Diligence Act

As previously reported, an agreement has been reached on comprehensive legislation that obliges large German companies to carry out due diligence regarding human rights and environmental issues in supply chains. On 3 March 2021, the German government formally approved the draft Due Diligence Act (Sorgfaltspflichtengesetz or Lieferkettengesetz), thereby officially launching the legislative process. The new government draft is based on the plans that were leaked in mid-February, but also makes some important clarifications.

• The government – reportedly at the request of the Ministry for Economic Affairs – has drawn a clearer distinction between the due diligence obligations relating to the companies’ own business activity and direct suppliers on the one hand, and the ones that apply to indirect suppliers on the other hand. In general, however, the previously mentioned hierarchy remains in place: primarily, the companies' obligations shall relate to their own area of business and – to a lesser degree – to direct suppliers, but they shall also have to take measures vis-à-vis indirect suppliers if “prompted by circumstance”. The Due Diligence Act is thus still supposed to cover the entire supply chain.
• Other amendments relate to enforcement. Most importantly, while most of the other changes are for clarification, the government specified that significant fines can be imposed in case of infringements. The amount of the fines shall depend on the type of the infringement at stake, the company’s motives and other aspects of the infringement. Depending on the individual circumstances, the fines shall, in principle, amount to up to EUR 800 000. However, for companies with an annual turnover of more than EUR 400 million, the fines shall amount to up to 2% of the average turnover. Annual turnover in this context is supposed to mean the average annual global turnover during the last three years. It is to be calculated on the basis of the global group turnover, i.e. all affiliated companies within the economic unit shall be taken into account.
• Further clarifications relate to, inter alia, the exclusion from public procurement and the possibility for NGOs and unions to represent victims in German court proceedings.

First reactions so far to the revised law have been mixed: while most companies and business associations fear significant burdens as a result of Germany’s solo effort and urge the German legislator to wait for the parallel legislation at EU level (read more here), the draft does not go far enough for human rights and environmental groups.

The draft law will now be referred to the German Parliament (Bundestag), where it is not guaranteed to pass. The government's timetable is to complete the legislative process by the time of the general election in September. It remains to be seen whether these plans will be implemented, or whether the draft law will become a hot electoral campaign issue. 

We will continue to monitor this legislative project as well as the parallel discussions at EU level closely on this blog as well as on our dedicated German knowhow page.