The landscape of corporate responsibility is shifting globally. For decades, the concept of "Business and Human Rights" (BHR) was largely guided by voluntary principles, most notably the UN Guiding Principles on Business and Human Rights (UNGPs) endorsed in 2011. However, a growing trend sees countries translating these principles into legally binding obligations. A prime example is Germany's Act on Corporate Due Diligence Obligations in Supply Chains (in German: Lieferkettensorgfaltspflichtengesetz - LkSG), which took full effect in stages starting January 2023. This law has significant implications not only for German companies but also for international businesses, including those from the US and Japan, that are part of global supply chains connected to the German market.

The Foundation: UN Guiding Principles (UNGPs)

Understanding the LkSG requires first grasping the UNGPs, which established the internationally accepted framework for BHR. The UNGPs rest on three pillars:

1. State Duty to Protect: Governments have a duty to protect individuals within their territory from human rights abuses committed by third parties, including businesses.
2. Corporate Responsibility to Respect: Businesses have an independent responsibility to respect human rights. This means they should avoid infringing on the rights of others through their operations and business relationships, and they should address adverse human rights impacts they cause, contribute to, or are directly linked to. The core operational element of this responsibility is conducting human rights due diligence (HRDD).
3. Access to Remedy: Victims of business-related human rights abuses must have access to effective remedies, both judicial and non-judicial (e.g., company grievance mechanisms).

HRDD under the UNGPs is an ongoing risk management process. It involves companies proactively identifying potential and actual adverse human rights impacts connected to their operations, products, or services through their business relationships; integrating these findings and taking appropriate action to prevent or mitigate impacts; tracking the effectiveness of their responses; and communicating how impacts are addressed.

From Voluntary Principles to Mandatory Legislation

While influential, the voluntary nature of the UNGPs led to calls for stronger measures to ensure corporate accountability. This spurred a legislative trend, initially focusing on specific issues like modern slavery (UK, Australia), conflict minerals (US), or child labor (Netherlands). More recently, comprehensive laws mandating broader Human Rights and Environmental Due Diligence (HREDD) across supply chains have emerged, with France's Duty of Vigilance Law (2017) and Norway's Transparency Act (2022) paving the way for Germany's LkSG.

Germany's Supply Chain Due Diligence Act (LkSG): Key Features

The LkSG aims to compel large companies operating in Germany to take responsibility for human rights and certain environmental standards within their global supply chains.

Scope of Application (Who is covered?):
The Act applies to:

• Companies, regardless of legal form, that have their head office, principal place of business, administrative headquarters, statutory seat, or a branch office in Germany, AND
• Employ a certain number of employees within Germany (counting employees of group companies and leased workers).
  • From January 1, 2023: ≥ 3000 employees.
  • From January 1, 2024: ≥ 1000 employees.
    This significant reduction in the threshold from 2024 greatly expands the number of covered companies, including many German subsidiaries of foreign parent companies (like those from the US or Japan).

Core Due Diligence Obligations:
The LkSG mandates covered companies implement a range of due diligence measures, closely mirroring the UNGP framework:

1. Establish a Risk Management System (Art. 4): Implement effective risk management procedures integrated into relevant business processes. This includes designating internal responsibility (e.g., appointing a Human Rights Officer).
2. Adopt a Policy Statement (Art. 6(2)): Define and publicly communicate a human rights strategy and expectations.
3. Conduct Risk Analyses (Art. 5): Regularly (at least annually, plus ad-hoc for significant changes) identify, assess, and prioritize human rights and environmental risks within own operations and among direct suppliers.
4. Implement Preventative Measures (Art. 6): Take appropriate measures within own operations (e.g., training, risk controls) and towards direct suppliers. Measures for direct suppliers include considering human rights criteria in selection, seeking contractual assurances of compliance (and ability to conduct audits), providing training, and conducting risk-based audits.
5. Take Remedial Action (Art. 7): If a violation is detected within own operations or by a direct supplier, take immediate appropriate action to prevent, end, or minimize the extent of the violation. This can range from developing a corrective action plan with the supplier to, as a last resort, temporarily suspending or terminating the business relationship.
6. Establish a Grievance Mechanism (Art. 8): Set up an accessible internal or external complaints procedure for individuals to report potential or actual violations along the supply chain.
7. Address Indirect Supplier Risks (Art. 9): While regular risk analysis focuses on direct suppliers, companies must conduct ad-hoc risk analysis and implement appropriate preventative/remedial measures regarding indirect suppliers if they gain "substantiated knowledge" (e.g., via grievance mechanism, media reports) of a possible violation further down the chain.
8. Documentation and Reporting (Art. 10): Continuously document compliance efforts and publish an annual report on the company website detailing the identified risks and due diligence measures taken.

Scope of "Supply Chain" and Protected Rights:
The Act covers the company's own business area, direct suppliers (contractual partners whose supplies are necessary for the company's product/service), and indirect suppliers. Obligations are tiered: most intensive for own operations, proactive for direct suppliers, and reactive (triggered by substantiated knowledge) for indirect suppliers.

Protected rights encompass core international human rights standards related to forced labor, child labor, discrimination, freedom of association, health and safety, adequate wages, land rights, etc. It also includes specific environmental obligations where violations could harm human health or livelihoods (linked to the Minamata, Stockholm, and Basel Conventions).

Enforcement and Penalties:
Compliance is monitored by the Federal Office for Economic Affairs and Export Control (BAFA). BAFA has powers to investigate, request information, conduct on-site inspections, and order specific actions. Non-compliance can lead to significant administrative fines:

• Up to €800,000 for individuals.
• Up to €8,000,000 for legal entities.
• For companies with annual global turnover exceeding €400 million, fines can reach up to 2% of their average annual global turnover.
  Furthermore, companies fined above a certain threshold (€175,000) can be excluded from competing for German public contracts for up to three years. Importantly, the LkSG does not create a new private right of action for victims to sue companies for damages based solely on a breach of the Act's due diligence duties, though non-compliance could potentially be relevant in existing tort law claims.

Implications for US and Japanese Companies

The LkSG's impact extends far beyond Germany:

• Direct Applicability: US or Japanese multinationals with German subsidiaries or branches meeting the employee threshold (≥ 1000 since Jan 2024) are directly subject to the Act's obligations.
• Indirect Applicability via Supply Chains: Perhaps more significantly, US/Japanese companies acting as direct suppliers to LkSG-covered German customers will inevitably be impacted. They can expect requests from their German partners to:
  • Sign supplier codes of conduct.
  • Provide contractual assurances regarding human rights/environmental compliance.
  • Fill out detailed questionnaires about their own operations and risk management.
  • Potentially undergo audits or provide evidence of compliance programs.
  • Implement corrective actions if risks or violations are identified in their operations.
  • Crucially, they may also be contractually required to cascade these expectations down to their own suppliers.
• Indirect Supplier Scrutiny: Even companies further down the supply chain (suppliers to the direct suppliers of German companies) may face scrutiny if issues arise. If a covered German company receives substantiated information about a violation by an indirect supplier (e.g., a component manufacturer in Asia supplying a Japanese direct supplier), it is obligated under the LkSG to investigate and take appropriate action regarding that indirect supplier.

This cascading effect means that the LkSG effectively sets standards that ripple through global value chains connected to the German market.

The Broader Trend: Towards EU-Wide Due Diligence (CSDDD)

Germany's LkSG is a significant national law, but it's also part of a broader European movement. The EU finalized its own Corporate Sustainability Due Diligence Directive (CSDDD) in early 2024 (awaiting publication and member state transposition). While details evolved during negotiations, the CSDDD is expected to:

• Apply more broadly than the LkSG (potentially covering more EU companies and non-EU companies with significant EU turnover).
• Cover a wider range of environmental impacts, including climate change mitigation (requiring climate transition plans).
• Critically, include provisions establishing civil liability, allowing victims to sue companies for damages resulting from a failure to conduct adequate due diligence.

Once implemented across the EU (likely in stages over the next few years), the CSDDD will create a more harmonized, and in some respects stricter, mandatory HREDD regime across the bloc, further amplifying the compliance imperative for global businesses.

Conclusion

Germany's Supply Chain Due Diligence Act (LkSG) marks a pivotal shift from voluntary BHR principles towards legally mandated corporate accountability for supply chain impacts. Its influence extends globally, requiring companies supplying the German market, including many US and Japanese firms, to demonstrate robust human rights and environmental risk management. Whether directly subject to the Act or indirectly impacted as suppliers, businesses need to proactively integrate UNGP-aligned due diligence processes into their operations and supply chain management. With the EU-wide CSDDD now adopted and mandating civil liability, the trend towards mandatory HREDD is undeniable and necessitates a strategic, global approach to responsible business conduct.