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In according to German Act on Corporate Due Diligence Obligations in Supply Chains of July 16 2021, the supply chain Act refers to all products and services of an enterprise. It includes all steps that are necessary to produce the products and provide the services, starting from the extraction of the raw materials to the delivery to the end customer and includes

• the actions of an enterprise in its own business area;
• the actions of direct suppliers and
• the actions of indirect suppliers

This includes the use of necessary services, such as transporting or temporarily storing goods.

Due diligence is the process by which companies can identify, prevent and mitigate actual or potential adverse impacts – also known as risks – in their own operations, throughout their supply chains and in their business relationships

Source: OECD (2018) OECD Due Diligence Guidance for Responsible Business Conduct

Due diligence is different from companies' traditional risk-management and compliance approaches.
Because companies can be associated with adverse impacts throughout their supply chain, so they will need to apply due diligence to companies beyond their direct or immediate suppliers.

Due diligence is also risk-based. However it is not focused only on risks to the company, but rather on risks that companies can cause, contribute to or are linked to - on people, the planet and society.

Risk-based also means that companies can prioritise actions beginning with risks that have the most negative or severe impacts on people and the planet, and act accordingly.
While developing due diligence strategies, companies should take into consideration the views of stakeholders such as workers, affected community members, civil society organisations and others - that may be affected by the companies’ operations and investment decisions.

Companies who carry out due diligence process are expected to provide access to remedy and consider ways in which their business decisions can contribute to negative impacts. A functioning due diligence system, enables companies to consider how their actions may cause or contribute to harms in the supply chain.

Source: OECD (2018) OECD Due Diligence Guidance for Responsible Business Conduct

The due diligence obligations for companies include:

• Establishing a risk management system
• Designating a responsible person or persons within the company
• Conducting regular risk analyses and issuing a policy statement
• Laying down preventive measures
• Taking remedial action and establishing a complaints procedure
• Documenting and reporting

The regulation that companies must meet are tiered based on the different stages within the supply chain: the company’s own business operations, direct suppliers and indirect suppliers.

In addition, when assessing whether the company’s risk management was appropriate, a distinction is made depending on the type and scope of the business operations, the company’s degree of influence, the expected severity of the violation and the way in which the company contributed to the violation.

Some national legislatures have introduced their own forms of due diligence laws, including:

• The 2017 French law on the duty of vigilance imposes due diligence obligations on large French companies (with at least 5,000 employees) to prevent human rights abuses in their operations and throughout their supply chains. To track its effectiveness, the Duty of Vigilance Radar, was created by NGOs to identify companies covered by the law and analyse their vigilance measures.
• Other legislation encouraging due diligence includes the UK Modern Slavery Act 2015 which requires that businesses (with a turnover above £36m) prepare a slavery and human trafficking statement for each financial year.
• In 2018, the Australian Modern Slavery Act established a national reporting requirement on large businesses in the Australian market with annual revenue of at least 100 million Australian dollars. Relevant businesses need to report on risks of modern slavery in their operations and supply chains as well as to provide actions to address those risks.
• In May 2019, the Netherlands adopted the Child Labour Due Diligence Law which will enter into force in 2022 and will require companies to submit a statement to regulatory authorities declaring that they have carried out due diligence related to child labour in their full supply chains.
• In June 2019, the Government in Finland published a plan to adopt mandatory Human Rights Due Diligence (mHRDD) legislation at the national level. In the initial stages of the plan, the government will conduct a study to assess the mHRDD proposal. The study will be conducted with employers’ associations, entrepreneurs associations and employees organizations, taking into consideration the position of SMEs. Read the Government’s programme (in Finnish) here.
• In Switzerland, the counterproposal to the Swiss Responsible Business Initiative is anticipated to enter into force in 2022. Among other measures, the legislation will impose compulsory due diligence for supply chains on Swiss companies that provide services or products with suspected links to child labor. The SRBI will apply to companies with at least 500 employees and a balance sheet sum exceeding CHF 20 million, or a turnover of CHF 40 million.
• In June 2021, the Norwegian Parliament adopted the Transparency Act. It wentered into force in July 2022, requiring U.S-based multinationals with operations in Norway to conduct human rights due diligence and publish an annual human rights statement. The companies concerned will at least have sales revenues of NOK 70 million, a balance sheet sum of NOK 35 million and at least 50 full-time employees.
• German Act on Corporate Due Diligence Obligations in Supply Chains (Lieferkettensorgfaltspflichtengesetz – “LkSG“). The LkSG lays down extensive obligations for companies with regard to their own business area, but also their direct and indirect suppliers.
• Proposal for a Directive on corporate sustainability due diligence adopted by European Commission on 23 February 2022. The aim of this Directive is to foster sustainable and responsible corporate behaviour and to anchor human rights and environmental considerations in companies’ operations and corporate governance. The new rules will ensure that businesses address adverse impacts of their actions, including in their value chains inside and outside Europe.

Yes. The business relations and production methods of direct suppliers must also be taken into account in addition to an enterprise’s own business area. If an enterprise has actual indications that suggest a violation of a human rights-related or an environment-related obligation at indirect suppliers, it must take action without undue delay and as warranted

The principle of appropriateness applies: Enterprises are only required to do what they can given their individual context, for example, their size, the nature of their business or their proximity to the supplier. Enterprises are not required to tackle all human rights challenges they have identified at the same time, but rather to focus on the main risks first. If a human rights violation does occur in its supply chain despite all (appropriate) efforts, an enterprise cannot be prosecuted.

The objective of the law is ensuring better protection of worker rights and the environment along the global supply chain. The law requires companies to establish appropriate and effective risk management for their supply chains, which is integrated into all relevant business processes. 

Companies in Vietnam can also be indirectly affected if they are part of a supply chain of a German company that must comply with the Supply Chain Due Diligence Act.

• From 2023 onwards: companies with more than 3,000 employees (900 companies).
• From 2024 onwards: Companies with more than 1,000 employees (4,800 companies). → After that, the area of application will be evaluated

• Companies have to put the following measures in place both in their own and in their direct suppliers’ business operations:
• Draft and adopt a policy statement on respecting human rights.
• Risk analysis: Implement procedures for identifying negative impacts on human rights. → Engage in risk management (incl. prevention and remedial measures) to avoid potential negative impacts on human rights.
• Establish a grievance mechanism.
• Implement transparent public reporting.
• In the event of a violation of rights, the company must, in its own area of business, take steps immediately that will necessarily cause the violation to cease.
• In the case of direct suppliers, the company must draft a concrete plan for minimising and preventing violations when it is unable to end the violation in the foreseeable future.

Here, the due diligence obligations apply only as warranted by the circumstances and as soon as the company learns about potential violations.

• In this case, the company has to act immediately and:
• conduct a risk analysis,
• implement a strategy to minimise and avoid the problem,
• firmly establish appropriate prevention measures vis-à-vis the one committing the violation. The implementation of industry-wide initiatives is a good option in this context.