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Germany’s Supply Chain Due Diligence Act has been effective since 1st January 2023. The new law requires large companies operating in Germany to carry out human rights and environmental due diligence on their business and its suppliers. Now, many countries are considering following Germany’s lead with similar regulations. In this blog, we look at how all companies can improve their compliance and due diligence processes to respond to this trend–with support from Nexis® Solutions.
Germany’s Supply Chain Due Diligence Act requires companies with at least 3,000 employees–whether they are headquartered in Germany or have a branch there–to have in place a process for carrying out supply chain human rights due diligence. This means screening prospective and current suppliers against risks including:
The law requires these companies not only to identify and assess third parties’ impact on human rights and the environment, but to prevent and remedy any adverse impacts. Eligible companies must therefore publish an annual report which spells out their approach to identifying and mitigating risks.
Failure to comply could bring significant costs to companies. A company could be fined up to 2% of their average yearly global revenue, or up to €800,000. They could also be temporarily excluded from applying for public contracts. What’s more, the Act’s scope will be extended in January 2024 to include companies with at least 1,000 employees in Germany.
The Act does not only apply to German-headquartered companies. It covers any company with a large branch in Germany and German subsidiaries of foreign companies who exceed the employee thresholds. In fact, all companies would be wise to take note of the law because the emergence of mandatory human rights and environmental due diligence legislation is among the main trends in modern global compliance.
Several countries and bodies have introduced similar regulations, including:
Many others are considering introducing human rights due diligence requirements on companies in the near future, including:
There are other good reasons for companies to implement human rights and environmental due diligence, beyond the legal and financial risk of breaching legislation. Consumers, employees and investors increasingly expect companies to demonstrate that they are tackling ESG risks, and those companies who cannot do this will suffer significant reputational damage. All companies should therefore understand the requirements of Germany’s law and consider how they could reorient their compliance process to comply with similar legislation.
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Becoming compliant with human rights and environmental due diligence is not a straightforward task. Many companies still take a traditional approach to compliance which focuses on financial and legal risks, rather than reputational, human rights or environmental risks.
An additional complication is that supply chains are becoming ever more complex which means a company needs to expand its due diligence to screen more entities. Moreover, the amount of data available online can make it difficult to find the most relevant information on a third party amid the noise.
So how can companies meet the challenge of mandatory human rights and environmental due diligence legislation? The best approach is to ensure they have access to reliable data on their suppliers and third parties. This data should cover a wide range of sources, including:
In today’s data-driven world with ever-growing volumes of information available, it is not easy to surface data which is most relevant for assessing a supplier’s human rights and environmental impact. The best compliance operations leverage technologies which instantly screen multiple entities against high volumes of authoritative data in all the areas outlined above.
Given regulators’ expectations that companies carry out ongoing monitoring, these systems should also flag any changes to a risk assessment of an entity when new information arises. That is where Nexis Solutions comes in.
Nexis Solutions help firms to implement a more efficient and effective due diligence process to identify and mitigate third party risk by providing companies with authoritative data from the most relevant sources, including:
We support firms to deploy technology across these sources to improve their approach to due diligence and risk management. For example: