German Supply Chain Act: What do Swiss companies need to know?
Mandatory human rights due diligence (HRDD) laws are on the rise – not only in Switzerland. In Germany, companies’ due diligence obligations under the Supply Chain Due Diligence Act (the "Supply Chain Act") started to apply on 1 January 2023, and first public reports will be published after companies’ financial year ends. What are the implications of this new law for Swiss companies? Read our Q&A to know more.
1) Is the German Supply Chain Act applicable to Swiss companies?
The German Supply Chain Act can apply to Swiss companies in two ways:
It is directly applicable to Swiss companies with a domestic branch office in Germany, with at least 3’000 employees (from 2023) or 1’000 employees in Germany (from 2024).
It indirectly concerns Swiss companies with German business customers that are directly covered by the law. As part of due diligence, the German customer must conduct a risk analysis of its Tier 1 suppliers and, if it has identified a risk or violation at a supplier, implement appropriate measures.
2) Which human rights topics are covered by the German Supply Chain Act?
Companies in the scope of the German Supply Chain Act must manage the following human rights topics:
Child labour
Forced labour and all forms of slavery
Occupational health and safety
Freedom of association
Unequal treatment in employment (discrimination),
Adequate living wage
Environmental impacts affecting people’s fundamental living conditions or health (e.g. through causing any harmful soil change, water pollution, air pollution, harmful noise emission or excessive water consumption)
Land rights (e.g. prohibition of unlawful eviction and unlawful taking of land, forests and waters which secures people’s livelihoods)
Abuse by private or public security forces
Additionally, the law also requires companies to conduct due diligence for certain environmental topics.
3) What are the requirements for companies directly covered by the law?
In short, the new Supply Chain Act requires companies to fulfil the following due diligence obligations:
establish a risk management system along the supply chain
designate a responsible person within the company
perform regular risk analyses to identify human rights-related and environment-related risks (with regard to the own business area and the direct suppliers of the company)
issue a policy statement on its human rights strategy
take preventive measures in the company’s own area of business and vis-à-vis direct suppliers and annually review the measures’ effectiveness
take remedial action in case of actual or imminent violations
establish a complaints procedure
implement due diligence obligations with regard to risks at indirect suppliers
document implementation of due diligence (internally) and publish an annual report
The German Federal Office for Economic Affairs and Export Control (BAFA) has published a series of useful guidance documents to support companies with the implementation of the law. It also developed a questionnaire that helps companies create an annual report which fulfils the legal requirements.
4) What will be expected of Swiss suppliers of companies covered by the law?
Companies in the scope of the German Supply Chain Act are required to conduct an annual (regular) risk analysis to identify human rights-related and environment-related risks at direct suppliers. In addition, companies are required to perform additional ad-hoc risk analyses along the entire supply chain based on substantiated knowledge of a possible violation or in the case of a change in business activity. As a part of the regular risk analysis, Swiss suppliers may have to answer questions on how they identify and manage human rights-related and environment-related risks within their own business area and in the supply chain. When risks are identified, companies must implement appropriate preventive measures vis-à-vis direct and indirect suppliers. In this context, Swiss suppliers may be asked to:
improve their human rights and environmental performance in order to pass the customers’ supplier selection procedures,
sign contractual assurances to comply with the customer's human rights-related and environment-related expectations and to appropriately address such expectations along the supply chain,
implement trainings in line with these assurances and
cooperate with the customers’ control mechanisms (e.g. audits) to verify compliance.
In case violations are identified, remedial actions are required. In this sense, due diligence duties will be passed on along the upstream value chain – from the companies in the scope of the law to their suppliers, and so on (trickle-down effect).
5) How can Swiss suppliers prepare for the increased customer requirements?
It may pose a risk to business continuity if a supplier is not able to respond substantially to the customer’s human rights-related questions. Considering the legal requirements, B2B customers may increasingly move to suppliers that are more advanced in implementing HRDD, and which can credibly demonstrate that they are managing their human rights risks along the supply chain in a systematic way. In this sense, HRDD is becoming a «must» rather than a «nice to have», even for companies that are not directly covered by the German Supply Chain Act.
To prepare for the increasing (business) customer requirements and remain an attractive supplier and business partner, companies can implement HRDD in line with international standards. This will allow them to respond positively and substantially to customer enquiries. As part of due diligence, companies will document their human rights-related processes and measures and publicly report on how they manage the risks. This facilitates customers’ access to the relevant information (e.g. which they need for the supplier risk analysis under the new law) and makes it easier for the supplier to respond to any type of human rights-related questions that may emerge.
6) What are the main differences between the German Supply Chain Act and the Swiss child labour due diligence requirements?
The German Supply Chain Act and the Swiss child labour due diligence requirements (as defined in the Swiss Code of Obligations Articles 964j and 964k and DDTrO) both require companies to implement due diligence with regards to certain human rights topics and publish an annual report. The two regulations differ, among other things, in the following key aspects:
Thematic scope: the German law covers a broad range of human rights (incl. child labour) and environmental topics, while the Swiss child labour regulation is limited to the topic of child labour.
Value chain covered: due diligence requirements under both laws cover the company’s own operations. With regards to the upstream supply chain, companies’ due diligence obligations under the German law are more stringent for direct suppliers than for indirect suppliers. Due diligence requirements under the Swiss regulation, in contrast, cover the full upstream supply chain, without distinguishing between direct and indirect suppliers.
7) What adjustments are required of companies directly affected by the German Supply Chain Act that already implement human rights due diligence?
Companies that already implement HRDD in line with the UN Guiding Principles on Business and Human Rights (UNGPs) or the OECD Guidelines for Multinational Enterprises are well prepared for the German Supply Chain Act. In some respects, however, the German law is more specific than international standards and prescribes in a detailed manner how companies need to implement due diligence. This includes, for example, the designation of a responsible person within the company, or specific content requirements for the policy statement. For this reason, we recommend companies to conduct a gap analysis of their current due diligence vis-à-vis the specific requirements of the German Supply Chain Act. Based on this analysis, companies can make the necessary adjustments to ensure full compliance with the law.
Conclusion
Swiss companies can be directly or indirectly affected by the German Supply Chain Act: either because they have a branch in Germany, or because they are suppliers or business partners to German companies. If the suppliers are not able to respond substantively to human rights-related questions, it may pose a risk to business continuity. Companies that implement HRDD according to international standards such as the UNGPs are well prepared for compliance with legal requirements in both Germany and Switzerland. To ensure full compliance with applicable laws, country-specific gap analysis and adjustments can then be added to the existing due diligence.
Many thanks to CMS for reviewing the legal aspects of the text.
Disclaimer: The information provided by focusright ltd. do not constitute legal or compliance advice and cannot replace the advice of a lawyer. focusright does not guarantee that its understanding of legal requirements corresponds to the interpretation of public authorities or courts.