The Supply Chain Due Diligence Act (LkSG)

In today’s globally connected economy, supply chains often span continents, connecting companies with suppliers, manufacturers and customers worldwide. This complexity can sometimes obscure the ethical and environmental impact of business processes. This is where the Supply Chain Due Diligence Act (LkSG) comes in, a ground-breaking law designed to ensure transparency and accountability in supply chains to guarantee human rights and environmental standards at all levels.

In this short article, we want to explain what exactly is hidden behind the tongue twister term Lieferkettensorgfaltspflichtengesetz (LkSG) and show you how you can get to the finished LkSG report without stress.

Table of contents

1. What is the Supply Chain Due Diligence Act (LkSG)?
2. Who is affected by the Supply Chain Due Diligence Act (LkSG )?
3. How is the Supply Chain Due Diligence Act (LkSG ) structured?
4. What do companies have to do according to the Supply Chain Due Diligence Act (LkSG )?
5. How do you decide what to report and what are the first steps for companies?
6. Conclusion

1. what is the Supply Chain Due Diligence Act (LkSG)?

The Supply Chain Due Diligence Act (LkSG) is a German law that strengthens corporate responsibility for compliance with human rights and environmental standards in their supply chains. Adopted by the Bundestag, it requires companies to review their supply chains for risks and report annually on their findings and measures. This report must be published on the company website and submitted to the Federal Office of Economics and Export Control (BAFA) by April 30 of each year. The first reporting deadline ended on April 30, 2024, but has been extended until the end of the year.

Example reports:

• Zalando SE LkSG Report 2023
• OTTO LkSG Report 2022-2023
• Porsche AG LkSG Report 2023

2 Who is affected by the Supply Chain Due Diligence Act (LkSG)?

From 2024, the LkSG will apply to companies that have their head office in Germany or operate a branch office in Germany and employ more than 1,000 people in Germany. This threshold aims to include major market players without overburdening smaller companies.

3. how is the Supply Chain Due Diligence Act (LkSG) structured?

The LkSG explicitly names 12 human rights-related and 8 environmental risks that fall within the scope of the law:

Companies must identify these risks in their own business area and with direct suppliers. Indirect suppliers only need to be analyzed if there are indications of a breach. Initially, an abstract risk analysis can take place in order to filter out suppliers that are active in certain high-risk countries. In the next step, these suppliers must then be specifically analyzed and evaluated according to certain appropriateness criteria.

4 What do companies have to do now according to the Supply Chain Due Diligence Act (LkSG)?

To meet the requirements of the LkSG, companies must implement a comprehensive due diligence system:

1. Risk management: Establish a risk management system.
2. Definition of internal responsibility: define an internal responsibility for the risk management system.
3. Regular risk analyses: Carry out annual or ad hoc risk analyses for your own business area and direct suppliers.
4. Policy statement: Issue a policy statement on its human rights strategy and its expectations of employees and suppliers.
5. Prevention measures: Define and implement prevention strategies in your own business area and with direct suppliers.
6. Remedial measures: Develop remedial measures and monitor their effectiveness. In the event of particularly serious violations, it may be necessary to terminate the business relationship.
7. Complaints procedure: Establish a process for stakeholders to report risks or violations and review effectiveness annually.
8. Due diligence obligations for indirect suppliers: In the case of potential risks from indirect suppliers, also carry out risk analyses, policy statements, etc.( points 2-6). (points 2-6).
9. Document: Publish a report on the supply chain by the end of April each year (if applicable, as part of the sustainability declaration in accordance with the ESRS).

There is currently no direct link between the Supply Chain Due Diligence Act and sustainability reporting in accordance with the NFRD/CSRD. However, there are major similarities in terms of content. For example, the European Sustainability Reporting Standards (ESRS) to be applied in future include reporting obligations on employees in the supply chain (ESRS S2) in the social area.

Accordingly, a draft bill has also been submitted in which it is proposed that the LkSG be amended so that companies that submit a sustainability declaration in accordance with the ESRS are exempt from the reporting obligation under the LkSG.

However, this does not exclude the risk management prescribed in the LkSG, but relates exclusively to the submission of the report.

5. how does Code Gaia support compliance with the Supply Chain Due Diligence Act (LkSG)?

Code Gaia offers a user-friendly solution for companies that have to comply with the requirements of the LkSG:

1. Supplier identification: Suppliers can be entered manually or recognized automatically from uploaded invoices.
2. Initial abstract risk classification: Suppliers are screened based on several factors (country of manufacture, industry, etc.) to create an initial risk assessment.
3. Review of the risk assessment: Companies can view and adjust the preliminary risk list and rank it according to relevance. In the event of deviations, for example if a company works closely with a supplier and has precise knowledge of their practices, the list can be corrected accordingly.
4. Supplier survey: After the risk list has been revised, a questionnaire is sent to the suppliers to ask about their certifications against the identified risks. Any missing certifications are explicitly followed up.
5. Final, concrete risk assessment: A final risk list is drawn up based on the suppliers’ responses.

Documentation of preventive and corrective measures: Companies document the preventive and corrective measures they have taken as well as their progress and effectiveness, and suggestions can be made in the software.

Here once again is a graphical representation of the abstract & concrete risk assessment in Code Gaia:

Code Gaia facilitates compliance by automating parts of the due diligence process, enabling the documentation of due diligence obligations and enabling companies to effectively address identified risks.

Our risk assessment works without cumbersome forms and surveys, so as not to burden business relationships and to facilitate cooperation with your suppliers.

Our module also works together with our ESRS modules so that you can cover both requirements with one solution. It is built in such a way that it can implement the future requirements of the CSDDD with little effort.

Take a look at our supply chain module now and find out how you can easily access your LkSG report.

6. conclusion

The LkSG marks a significant step towards responsible business practices by requiring transparency and accountability in supply chains. As companies prepare to comply with these new standards, tools like Code Gaia will be essential to navigate the complexities of compliance and promote ethical business practices.