Applicable to companies operating in Germany with more than 3,000 employees (as of 2024, lowering the threshold to 1,000). Business that are part of the supply chains of those companies (directly or in tier 2 or more in some industries) will likely be required to respond to their ESG disclosure requests.

The German Supply Chain Act or Lieferkettensorgfaltspflichtengesetz (LkSG) aims to protect human rights and limit environmental harm by making it mandatory for companies in the scope noted above to conduct supply chain due diligence. LkSG mandates organizations to conduct risk identification and management, due diligence activities, and mitigation actions, as well as publish annual reports. Non-compliance can be costly, with penalties and fines ranging up to two percent of the company’s annual turnover.

In other words, companies within the scope of the German SUpply Chain Act must set up the following due diligence procedures:

1. Establish a risk management system
2. Define responsibility for compliance by, for example, appointing a human rights position
3. Carry out regular risk analyses
4. Adpot a policy on the company’s human rights strategy
5. Implement preventive measures in the company’s own business area, which includes the activities of subsidiaries
6. Take action in case of violation
7. Set up an internal complaints procedures
8. Establish and document due diligence procedures regarding risks associated with indirect suppliers
9. Publish an annual report detailing due diligence procedures, risks identified and measures taken