Germany | 1 min

The New Supply Chain Law Is Radically Diluted

Germany prides itself on its new draft for the Supply Chain Law, which is supposed to protect human rights. Could this be an example for the EU to follow?

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Armin Paasch
The miners of the brown coal during a strike in Breza, Bosnia and Herzegovina, chains hanging from the ceiling.

After a long and tough struggle, on 3 March, the German Federal Cabinet approved a draft law to prevent human rights violations and environmental damage in the supply chains of German companies. The government is thus initiating the long-overdue paradigm shift from merely voluntary corporate social responsibility to legally binding requirements: in future, violations are to be punished – by means of fines and even exclusion from public contracts. With an unprecedented lobbying offensive, however, business associations and the economic wing of the CDU/CSU had previously succeeded in significantly weakening the plans of Labour Minister Hubertus Heil and Development Minister Gerd Müller. The Supply Chain Law thus fails to do justice to the need to protect universal human rights.

There are four obvious problems in the current legal text: firstly, the full due diligence obligation for German companies is limited to direct suppliers. Accordingly, companies only have to investigate the risks of indirect suppliers if they have already gained “substantiated knowledge” of possible human rights violations. Secondly, the civil liability rule was deleted so that injured parties from the global south still have no chance of suing for damages in Germany. Thirdly, compared to the original plans, the scope of application has been limited by 60 percent to around 2,900 companies with more than a thousand employees. Fourthly, environmental standards are only selectively taken into account with regard to mercury emissions and certain other pollutants.

The “Initiative Lieferkettengesetz” (Initiative Supply Chain Law), a civil society alliance of 124 development, human rights and environmental organisations as well as trade unions, is therefore calling for fundamental improvements to the Bundestag’s legislative process. Whether this will succeed is uncertain. No sooner had Economics Minister Peter Altmaier and Chancellor Angela Merkel agreed to the compromise than the CDU’s Economic Council called on members of parliament to “stop” the “left-wing ideological” project in the Bundestag altogether. It is therefore uncertain whether the Supply Chain Law will be passed at all in the growing election campaign din of this legislative period. It is also questionable how effectively it can prevent human rights violations involving German companies.

What I don’t know won’t hurt me

Human rights violations also occur in Germany, for example in slaughterhouses, in asparagus harvesting, or with parcel service providers. Far more frequent and devastating, however, are the negative externalities in the global south: child labour in the cocoa harvest in west Africa, displacement and water contamination from bauxite mines in Guinea, forced labour of Uyghurs on Chinese cotton plantations, and exploitation and fire disasters in Asia’s textile factories are just a few examples. The problem is that German companies usually do not buy cocoa, metal ores, and T-shirts directly from the producer, but through several stages of processing and intermediary trade.

It is therefore completely unacceptable that the draft of the Supply Chain Law initially only requires human rights risk analyses, as well as preventive and corrective measures by German companies in their own business areas and with direct suppliers. But it is hardly to be expected that Daimler or BMW will find serious human rights violations at the steel company Thyssenkrupp in Essen. The situation is quite different, however, with the Brazilian mining giant VALE, which provides a large part of the iron ore used by Thyssenkrupp. The dam burst at the iron ore mine in Brumadinho in January 2019 alone killed 272 people. Aldi and Lidl also source bananas from a handful of direct suppliers in Germany. If supermarkets lower their purchase prices, they still contribute to exploitation on banana plantations in Ecuador.

Nevertheless, the Federal Association of German Industry (BDI), Confederation of German Employers’ Associations (BDA), and the Association of German Chambers of Industry and Commerce (DIHK), as well as the economic wing of the CDU/CSU in the Bundestag have repeatedly demanded that the human rights due diligence obligations be completely limited to the first link in the chain. The draft law now at least demands that companies must analyse risks and take corrective action if they become “substantially aware” of a possible human rights violation. This can be done through the company’s own complaints mechanism, the competent supervisory authority or other sources of information. Looking the other way despite outside warning is thus sanctioned.

However, it can be assumed that only a small proportion of human rights violations in the supply chains of German companies are made public, and ultimately are brought to the attention of the customer. On the contrary, for companies that already analyse the entire supply chain, the draft law could even create an incentive to focus only on direct suppliers in order to avoid having to take corrective action in the deeper supply chain. What I don’t know can’t hurt me, as the saying goes. With regard to indirect suppliers, the draft law thus moves away from the precautionary principle, which is central to the UN Guiding Principles on Business and Human Rights of 2011, even if it is not binding.

No civil liability for damage caused

If German companies cause damage to people abroad, it should actually be a matter of course that they are also liable for this in German civil courts. In fact, however, the chances of success for those affected in such proceedings are very low as long as human rights due diligence obligations are not anchored in German law and are not applied in civil proceedings in this country.

An example of this is the devastating fire at the Pakistani textile factory Ali Enterprises in September 2012: 252 workers suffocated or burned to death because emergency exits were blocked and windows were barred. The main customer of the factory was the German textile discount shop KiK, which, by its own admission, bought up to three-quarters of the factory’s production in 2011. KiK claims to have regularly assessed occupational safety and working conditions through audits. However, with due diligence in terms of human rights, the company should have recognised the serious deficiencies in fire safety and demanded that they be remedied, which did not happen.

Four affected persons, therefore, filed a civil lawsuit before the Dortmund Regional Court in March 2015. In accordance with international private law, however, the law of the country where the damage occurred, ie Pakistan, was applicable. Human rights due diligence obligations are not explicitly anchored therein. Most importantly, Pakistani law provides for exceedingly short limitation periods, which is why the lawsuit was dismissed on formal grounds in January 2019.

Another civil action is currently pending at the Munich Regional Court against TÜV Süd. Its Brazilian subsidiary had issued a stability declaration for the dam of the iron ore mine in Brumadinho in September 2018 – despite known and serious defects. Four months later, the dam burst, leaving behind a devastated environment in addition to many deaths. Brazilian law, not German law, will be applied in these proceedings as well. The outcome is therefore highly uncertain.

The Initiative Lieferkettengesetz, therefore, calls for an explicit liability rule in the Supply Chain Law, according to which German companies would be liable before German civil courts for foreseeable and avoidable damage caused by their disregard of human rights due diligence obligations. Such a provision would also apply to cases of damage abroad and thus create legal certainty for those affected as well as for companies.

Labour Minister Heil and Development Minister Müller supported this demand but failed due to the opposition of Economic Minister Altmaier and Chancellor Merkel. They were only able to push through a paragraph on “special legal standing”, according to which injured parties will in future be able to authorise trade unions or NGOs to take legal action under civil law. This could lower some procedural hurdles, costs and financial risks for those affected in civil proceedings, but does not alter the basic problem.

The BDA, the BDI, and the CDU’s Economic Council had previously spent months campaigning against the liability of German companies. They deliberately spread misinformation according to which companies would have to be liable for any human rights violation in their unmanageable supply chains without any action on their part. The head of the BDA at the time, Ingo Kramer, remarked that with a Supply Chain Law, “I’m already standing with both feet in prison”, although a criminal law component had long since ceased to be debated. Economist Lars Feld complained that a Supply Chain Law would “put an axe to the successful model of the German economy.” Feld was not only chairman of the Economic Experts until February 2021, but also still chairs the scientific advisory board of the CDU Economic Council.

The end of voluntarism

At least the law puts an end to the dogma of voluntary corporate responsibility that has been cultivated for decades. Last year, a monitoring study commissioned by the German government concluded that only 13 to 17 percent of German companies with more than 500 employees voluntarily fulfilled their human rights due diligence obligations. Under pressure from Altmaier and the business lobby, only companies that voluntarily participated in the survey were examined. The plausibility of their answers was also only superficially checked and the assessment criteria did not correspond in large parts to the UN Guiding Principles on Business and Human Rights of 2011, the implementation of which the business associations had already promised at the time.

In the future, at least companies with more than a thousand employees will have to reckon with coercive penalties and fines if they do not carry out risk analyses, take preventive and corrective measures or provide complaint procedures. For large companies, fines can be as high as two percent of annual turnover. In the event of serious violations involving fines of 175,000 euros or more, companies could even be excluded from public contracts. The responsible Federal Office of Economics and Export Control (BAFA) checks the reports of the companies, can demand documents and also enter business premises. If those affected complain about human rights violations, BAFA can also carry out “risk-based controls” and oblige the companies to take action.

In principle, these provisions are to be welcomed. However, their effectiveness will depend to a large extent on how independently and actively the authority pursues and sanctions possible administrative offences. Against this background, it is worrying that the BAFA is a subordinate of the Federal Ministry of Economics and has not shown much zeal in the past, for example, in controlling arms exports.

While NGOs, trade unions and the German Institute for Human Rights are calling for fundamental improvements, the BDA continues to reject the Supply Chain Law as a “dangerous national Sonderweg [special path]” and “far too far-reaching” [editor’s note: referring to the historical theory of the “German Sonderweg”]. The German Association of the Food Industry (BVE) demands further restrictions of due diligence with regard to indirect suppliers. Karl Haeusgen, head of the mechanical engineering association VDMA, even warns that the threatened sanctions could “drive German companies to ruin”. Such doomsday scenarios are strongly contradicted by leading economists such as Achim Truger, a member of the Economic Wise Men, and Marcel Fratzscher, head of the German Institute for Economic Research. Fratzscher, for example, complains about the lack of a civil liability rule and even fears that the law could “cost German companies dearly” due to overly lax provisions because it attacks “the reputation of goods ‘Made in Germany’.”

Didier Reynders, the EU’s justice commissioner, also thinks the German law does not go far enough. He had hoped for a stronger signal for his plans at EU level. In June, he announced his proposal for a regulation that would apply to all companies, take environmental concerns into account more comprehensively and, in addition to fines, also provide for criminal sanctions and civil liability. He received support from a legislative report by the European Parliament on 11 March. If the EU Council follows this, the more far-reaching provisions would have to be subsequently incorporated into the German Supply Chain Law. However, one should not rely on this. Although the BDA and BDI now refer to EU regulation, their joint umbrella organisation BusinessEurope in Brussels is doing everything in its power to water down this plan beyond recognition.

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