It is my pleasure to welcome Daniel Schönfelder and Michaela Streibelt on Rights as Usual.

Daniel Schönfelder is a lawyer and lecturer in business and human rights. He is partner of the law firm blue marble legal. He works as Lead European Legal Advisor for the Responsible Contracting Project and in-house on the implementation of the German Supply Chain Due Diligence Act.

Michaela Streibelt is a lawyer, lecturer, and advisor in business and human rights. She is partner of the law firm blue marble legal. Prior, she worked for the German Helpdesk on Business and Human Rights as an Advisor on all sustainability laws . She also works as European Legal Advisor for the Responsible Contracting Project.

This post is theirs.

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The due diligence obligations of the German Supply Chain Act (LkSG) have been in force since January 2023; the law was passed in July 2021. It is based on a complex compromise between the social democrats and the conservatives, which left it with strengths and weaknesses for the protection of human rights and the environment (in detail: here). The strengths include a clearly defined list of due diligence obligations and protected human rights and environmental positions (the term “positions” refers to specific rights and interests that are legally protected), a focus on effectiveness and appropriateness that balances impact and implementability well, and a strong enforcement mechanism. The weaknesses include unclear rules on the risk–based approach in relation to tier–n, remediation, rightsholder engagement and civil liability. In this analysis, however, we do not want to focus on legal interpretation, but on practice.

Change takes time, especially in such complex structures as global supply chains. All actors within the human rights and environmental due diligence (HREDD) ecosystem are still learning. The claim that the LkSG is only a bureaucracy monster ignores improvements and good practices. It is changing living and working conditions in global supply chains for the better already; rightsholders and NGOs use the law to make their voices heard and achieve improvements, in Europe, Germany and worldwide (see here and here). Human Rights are becoming mainstream in companies and good corporate practices show that HREDD can be done in an unbureaucratic and effective way.

As practitioners who accompanied companies, NGOs, and regulatory actors throughout the process, we take a look back at what works well, what does not, and what can be done to improve things. We focus on corporate practice, rights holders, and the role of the state.

Companies invest – sometimes in bureaucracy, sometimes in impact

The Supply Chain Act has put human rights on companies’ agendas. They hired experts, created internal risk management systems, involved sustainability, procurement, and compliance departments – and started taking action. Suppliers worldwide have taken note and are starting to prepare themselves, often seeing sustainability as a new chance for a competitive edge. Unfortunately, company processes are often too bureaucratic: they often treat HREDD as an HQ matter, something to be executed from desks in big German cities, instead of on the ground with rightsholder and supplier engagement. And instead of proceeding in a prioritized and targeted manner, companies often overwhelm suppliers with standardized questionnaires that treat bananas like t–shirts and focus on superficial questions that create neither insights nor reliable answers (“Do you respect the prohibition of child labour?”). Instead of addressing complex problems with suppliers step by step, risks and responsibilities are often passed on through contracts that require unrealistic perfection (“I confirm not having any human rights risks in my supply chains.”). A small number of companies even punishes whole continents by withdrawing (see here). This is often based on false promises from IT–tool providers and advice that the law can be fulfilled “automatically” (in detail: here and here). These tick-boxing and risk- and responsibility-shifting practices are indeed feeding a bureaucracy monster (more details: here) – but maturing corporate practice and the LkSG itself are showing the way on how to kill it.

Leading companies balance effectiveness and implementability

These described practices are not only based on a false understanding of the LkSG. They even fail to meet some of the LkSG’s central requirements The LkSG requires companies to focus on effectiveness and continuous improvement as well as appropriate measures that address their own responsibility as buyers (in detail: here and here). The LkSG also requires engaging rightsholders (Sec. 4 (4)) and conceptualizing ex-ante effective measures (an anti-tick-boxing requirement – you have to think about effectiveness to be compliant, Sec. 4 (2)). More mature companies understand this requirement. They focus on effectiveness, designing meaningful measures that create decent chances for improvement. They focus on appropriateness and prioritization to follow a less–is–more approach: fewer but targeted measures based on a deeper understanding of root causes and focused on improving prioritised impacts. Hapag-Lloyd, for example, differentiates between typical risks per product when requesting information, first prioritising key risky products and services, then building its own understanding. Accordingly, they only request specific information from selected suppliers. C&A recognises their shared responsibility for human rights and responsible purchasing in contractual terms with their suppliers. Mercedes takes a risk-based approach to impacts even in deeper supply chains, including “theory of change” approaches, thereby showing how to implement the ex-ante effectiveness requirements (Sec. 4 (2)). Lidl analyses the gaps between actual and living wages on banana plantations to compensate for them by paying bonuses directly to workers. Lidl also goes beyond HQ-based HREDD, doing HRIAs on the ground for high risk products and publishing the results transparently. Sector initiatives conduct joint risk assessment of deeper supply chains and publicise findings (see here and here), develop joint standards on Responsible Purchasing for their sector and engage suppliers jointly, for example by streamlining requirements to be implemented by suppliers or conducting joint control measures and building joint grievance mechanisms.

First improvements for rightsholders

At the same time, right-holders are beginning to use the law. NGOs often rely on this strategy (for example: RTDD): they talk to workers to get information about rights violations and the buying companies. If they identify companies that are within the scope of the law, they file complaints using companies’ internal complaints channels. This led to improvements in several cases, including on German motorways in Gräfenhausen, where exploited truck drivers received remediating compensation after using the LkSG to call on the companies that were customers to their exploitative employers. Trade unions abroad and German trade unions cooperate to bring cases to the complaint channels of companies and the enforcement authority BAFA (see UAW case from the US). Recently, exploited farm workers achieved remediation in a case of exploitation in the banana supply chain of Aldi. Such cases are likely to become more frequent as trade unions set up a joint competence centre. This way, the Supply Chain Act is becoming a tool for international solidarity in action.

Strengthening pillar 1

UNGP 1 and 3 clearly point out the need for active State measures and enforcement to protect human rights. We will demonstrate that the current approaches need to be improved. The BAFA (the Bundesamt für Wirtschaft und Ausfuhrkontrolle, Federal Office for Economic Affairs and Export control which is responsible for the enforcement of the Act) takes a “dialogue-based approach” for enforcement. If it identifies shortcomings, it first demands improvement and does not issue sanctions. This is important because the obligations are complex and entail a learning process for everyone. However, BAFA has not yet imposed a fine. NGOs rightly criticize this. If there are no fines, companies take the law less seriously. NGOs also report issues in BAFA‘s complaints channel: access to files were until recently denied, there is no regular information about the status of the proceedings, and justifications of decisions are rare. This will likely further worsen as the supervising ministries formally ordered BAFA to focus on most severe cases.

UNGP 3 (c) requires States to provide effective guidance to companies on how to

respect human rights throughout their operations. The German government combines controls with several helpful forms of support to companies. For example, the CSR Risk Check helps to identify risks, while the BHR Navigator and Sustainability Compass provide support for companies in developing measures. Additionally, the BAFA offers detailed guidance on HREDD according to the LkSG. The government Helpdesk on Business and Human Rights provides free advice to businesses. However, there is room for improvement: companies often have to develop or purchase data and tools that are standard solutions everyone needs. They should thus be made available open access. And despite competition law often making cooperation more difficult (in detail: here), practical guidance by the competent authorities on how companies are allowed to cooperate on LkSG measures (as required by Sec. 7 (2) No. 2, 9 (3) No. 2 LkSG) is missing. Notably, other EU Member States like the Netherlands have provided such guidance already.

The state’s approach is lacking coherence: while big companies have to consider human rights and the environment in their procurement processes (Sec. 6 (3) No. 2 LkSG), public buyers do not, even though UNGP 6 requires State procurement to take human rights into account. Public procurement represents approx. 18 % of the German GDP and accordingly could create a lot of positive impact. Unfortunately, studies show that less than 15 % of tenders include sustainability criteria. This constitutes a missed opportunity for sustainable transformation.

A more active involvement of the German State would also help strengthening coherent and strong policy for sustainable development in times of shrinking State–development budgets. Companies’ HREDD could help fill gaps: The Sustainable Development Goals (SDGsDs) largely overlap with international human rights (in detail: Krajewski). That means essentially that companies’ efforts in relation to mHREDD should help deliver on the SDGs (as long as the unsustainable situations are linked to adverse impacts in their value chains). At the same time, companies still lack expertise on HREDD and many struggle identifying and addressing their most relevant adverse impacts effectively. This often results in wasting resources on the above-mentioned tick-boxing practices, losing potential for sustainable development. State development agencies have considerable expertise, but less and less resources. They often know what should be done but increasingly lack the means to do so.

Smart development cooperation policy would make the best of this difficult situation by providing companies with the expertise needed to help them implement meaningful HREDD to at least try to fill the gaps the shrinking budgets leave for sustainable development.

Concretely, this could work in the following way: the German government – and European development cooperation – could start by identifying the highest risk sectors in the European economy, define their salient risks and typical measures to address them and publish all this in sectorial guidance (ideally alongside CSRD sector guidance). This guidance should be informed by engagement with relevant stakeholders – rightsholders and their representatives as well as companies in Europe and the supply chains, for example. In this way, the whole power of the European market could be leveraged to collectively solve sustainable development challenges. States could accompany this guidance with targeted support measures in important production regions, for example, programs to improve human rights and environmental conditions in regions that are relevant for high-risk sectors and supply chains.

Different programs of the German government can serve as good examples (see for example the Sustainable Agricultural Supply Chain Initiative (SASI), the Partnership for Sustainable Textiles (PST), or the DeveloPPP programme). Companies can then choose to develop their HREDD based on this guidance, joining state-led measures and proposing new ones for prioritised impacts. They might also–decide to take independent measures, if appropriate. In this way, companies and the State could use their comparative advantages to make the best for sustainable development out of a situation of shrinking budgets.

Other countries should learn from Germany’s successes – and mistakes

While Europe and Germany are caught in endless debates on which rules for dignity and a healthy planet are mere “bureaucracy”, the rest of the world is moving on. More and more countries are looking into mandatory human rights and environmental due diligence obligations. Debates on a global binding treaty and initiatives for laws in Taiwan, South Korea, Thailand, Indonesia, Colombia, Switzerland, and Brazil are moving forward. Standard setters in these countries can take inspiration from lessons learned and mistakes made in France, Germany, and Norway. From the German experience, three lessons stand out:

1. HREDD is difficult and needs deep analysis. Without prioritisation, it is overwhelming. Companies need comprehensive support, open access tools, and guidance – especially on prioritisation – to overcome feeling overwhelmed (“thousands of suppliers…”). They will have to be shown, not by referring to principles, but with examples of procedures and formulas on how to get from thousands of suppliers and hundreds of products to the first manageable list of high-risk products to analyse. See some first thoughts on this here, p. 6 f.). Otherwise, companies will listen to the siren promises of “easy” solutions that risk building tick–boxing bureaucracy monsters.
2. Good HREDD needs to balance implementability and effectiveness. Too many advisers focus only on implementability, scaling “easy” solutions that do not create impact but bureaucracy. Too many NGOs and academics focus only on effectiveness, expecting work- and resource–intensive solutions without telling companies how to scale them via prioritisation. Governments should include appropriateness and effectiveness criteria and explain in depth and practically how businesses can use them to keep HREDD implementable and impactful (see first attempts by BAFA here and here).
3. A dialogue-based approach to enforcement is prudent but teeth are important. Enforcement needs to recognize the complexity of the topic and the need for joint learning in the ecosystem of authorities, companies, and NGOs. However, enforcement needs to become stricter over time, with sanctions for bad practice after a learning period. Otherwise, enforcement risks losing credibility.

The best time of the law is yet to come

The Supply Chain Act holds significant potential to improve working conditions and the environment worldwide. This potential is only just beginning to unfold. Companies are improving their processes and overcoming bureaucratic approaches, rights holders are learning about their rights and forming alliances for claiming them, and the State is expanding support services. We have a great opportunity to continuously make the globalized economy more humane and bring old narratives of international solidarity back to life.