The LkSG: Germany's supply chain law

From January 1, 2024, the application of the Lieferkettengesetz (Lksg), the German law already in effect since 2023 that envisions the application of sustainability on various social issues: it not only concerns compliance with rules to protect the environment, but also human rights.

We find ourselves within a context in which. the entire supply chain is called upon to conduct a two diligence effective and efficient, with the aim of preventing and combating violations that occur not only within one's own company, but throughout one's supply chain.

All companies involved, German and foreign, will be held accountable for serious penalties for violations.

The importance of Due Diligence in the Lksg

The due diligence that is demanded of the direct supplier is the same as that demanded of the German company: responsibility in terms of environmental sustainability and human rights of companies does not end within their plant, but also persists throughout the entire supply chain. In particular, it is urged to establish and adopt all those necessary measures to prevent, reduce or eliminate any risk pertaining to the violation of human rights or the environment. Ved in detail how it works.

Which companies are impacted by the Lksg

As already mentioned, From January 1, 2023, all companies in Germany that count at least 3,000 employees, they must comply with due diligence in terms of environmental and human rights protection in their supply chains. But beware: from January 1, 2024, the law will also apply to companies with at least 1000 employees. 

Although the law primarily affects companies that have Registered, head and administrative office in Germany, followed by the branches and from the branches of German companies abroad, the Lksg also has an impact on direct and indirect suppliers involved in the supply chain and therefore also on Italian companies.

Going into detail, the standard extends:

• To Italian companies that are not based in Germany, but serve as the direct suppliers of a German company subject to the law (by becoming part of their supply chain, they are required to comply with the above obligations);
• To the Italian companies that are indirect suppliers, that is, the suppliers of the German company's direct suppliers. Of course, action will be taken only in cases where there are clear and unambiguous indications suggesting their violation of human rights (e.g., if there is no right of association in a country, it is an already clear signal of human rights violation).

So, in practice, it will be the Italian supplier that will have to guarantee its reliability in relation to the law. In the event that the German company insists on exercising control over indirect suppliers as well, then Italian companies that are not based in Germany should also draw up and keep up-to-date a list of their suppliers, so that German customers can be assured of compliance. 

How should Italian companies act to comply with Lksg?

The following 9 measures are a perfect summary of what is required as of January 2024 (for all Italian companies based in Germany that have at least 1,000 employees; but they also extend to Italian suppliers in the ways reported above). What are these measures in concrete terms?

1. Establishment or expansion of a system of risk management that also covers sustainability aspects in the supply chain;
2. Definition of responsibility internal: for example, the appointment of a human rights officer with appropriate authority and expertise; 
3. Regular risk analysis: The company is committed to identifying the steps in its production and supply chain and, therefore, identifying any negative impacts on human rights and the environment in a systematic and comprehensive manner; 
4. Issuance of a statement of principle that highlights the main human and environmental risks and the respective measures identified for the prevention of such. This must be approved by management and reflect the company's values. It is recommended that it be communicated on the company website in a direct and transparent manner. 
5. Arrangement of preventive measures In its own business sector and to direct suppliers, while in the case of indirect providers they will apply only if there is actually evidence identifying violations;
6. Application of mcorrective measures in the event of a violation of a protected legal position in order to end or reduce it. They must be timely and effective;
7. Establishment of a complaints procedure or complaint handling communicated in a transparent and easily accessible manner to stakeholders;
8. Implementation of its own Duties of due diligence at indirect suppliers: the goal is to “push” them to comply To the standard, in case of violation. 
9. Drafting a annual report To be submitted to the German Ministry of Economy and Export Control (BAFA) summarizing the points listed so far: the company's identification of the risks, the measures put in place to fulfill due diligence, how effective these proved to be, and what conclusions were drawn for future measures. 

What are the penalties under Lksg?

If companies fail to comply with their obligations to conduct a risk analysis, establish a grievance procedure, take preventive measures, and effectively remedy established human rights violations, they can face fines of up to 8 million euros or up to 2% of their annual turnover. Turnover-related fines apply only to companies with annual turnover exceeding 400 million euros.

Why you need to give importance to lksg

The impending extension of Lksg can only be considered in positive outlook: on the one hand, it provides new opportunities for the creation of business relations increasingly sustainable for all those who are intent on broadening the horizons of their business; on the other hand, it guarantees Italian supplier companies to maintain a bargaining power strong and stable vis-à-vis their German partners. Suffice it to say that German companies subject to Lksg will inevitably tend to favor those trading partners who show themselves willing to cooperate actively and transparently.