Even before it has taken effect, a new German law obliging companies to strengthen due diligence across their entire supply chains has drawn complaints from virtually all sectors of the economy that are active in international markets.

The country's powerful machine builders association, VDMA, described the risks from the new law, which will be in force from January 1 next year, as "incalculable." The head of the German-African Business Association, Christoph Kannegiesser, decried the regulation for putting German companies at a "competitive disadvantage" over their global rivals. Hans Peter Wollseifer, the president of the Confederation of Skilled Crafts, lamented the additional burden the government would impose on businesses at a time the economy is staring into a recession.

Kannegiesser has also warned that the law would hurt German investments in Africa, which would not only lead to fewer jobs but also limit the ability of countries to eradicate child labor. Strabag International, a global player in the construction industry, has announced it would exit Africa for good after finishing existing projects in the continent. The reason for the decision, Strabag CEO Jörg Wellmeyer told the business daily FAZ recently, was not least of all the mandatory supply chain obligations imposed by the new law.

Corporate supply chains 'impossible to control'

Despite the corporate lament, Germany's ruling coalition pushed the bill through parliament, expanding existing corporate due diligence obligations to areas such as human rights, environmental protection and workplace safety.

The law's scope is initially limited to companies that employ at least 3,000 employees but will be extended to companies that employ at least 1,000 employees from January 1, 2024. Nearly 3,000 German companies fall into this bracket, but the real number of affected businesses is estimated to be much larger, given that their upstream suppliers may also need to play by the new rules. 

In their criticism, German corporations have frequently pointed to the huge number of smaller companies in their supply chains whose compliance they say is impossible to control. German telecom giant Deutsche Telekom, for example, said it has 20,000 suppliers, while carmaker Volkswagen mentioned 40,000 and chemicals maker BASF about 70,000 individual firms contributing to their end products.

The early bird

German mid-sized company uvex has about 30,000 suppliers in 79 countries to watch over, said Susann Schubert, who is in charge of sustainability policy at the family-owned business based in the Bavarian town of Fürth. If one counts the suppliers of the suppliers, the number would be "five to ten times higher," she told DW.

Uvex, which is best known for its ski goggles and helmets, claims it has already established due diligence standards in its supply chain.

Observing the United Nations' so-called Guiding Principles on Business and Human Rights, the company has "established social standards for all of its suppliers since 2008," Schubert said, adding that specific monitoring processes have been in place for years.

With a catalog of 31 principles, the United Nations provided the first global standard for preventing and addressing the risk of adverse impacts on human rights linked to business activity. In June 2011, the United Nations Human Rights Council unanimously endorsed the principles, and governments, including Germany's, adopted national action plans in support of them. 

Uvex lays a great emphasis on selecting its suppliers according to the UN principles, said Claus-Jürgen Lurz, an executive with the company's Safety Group unit, which produces safety equipment for professionals.

"Even before the [German] supply chain due diligence act was adopted, we'd been well prepared for the requirements of the new regulation," Lurz told DW. The only changes uvex needed to make were in documentation and risk assessment, he added, meaning they had to "adjust and not newly implement" the processes.

Uvex controls its supply chains through several steps, including, first of all, regular audits by an external auditing service. Secondly, uvex compliance teams visit suppliers on a regular basis, often several times a month, to ensure environmental and social standards are being maintained. They inspect workplace conditions and commission product audits to ensure, for example, that hazardous materials aren't being used.

Slipping through the fence

Lurz and Schubert admit though that monitoring the operations of "the suppliers to the suppliers" is difficult. The two executives mentioned the company's safety boots as an example, where uvex sought to replace some of the leather components with synthetic materials to be able to control supplies more effectively. 

"We haven't been able to secure oversight over the firms that slaughter the animals for the leather because the material is mainly sourced from the spot market," said Schubert, adding though that buying the leather mainly in Europe, as uvex does, would limit the risk of breaking the law unintentionally.

What also helps are country compliance reports done by uvex, assessing the risk of suppliers based in foreign jurisdictions by finding out how common human rights violations or poor environmental standards are in their country. The reports serve as a basis for possible interventions by the firm.

All of this would be nothing, however, if suppliers wouldn't be willing to cooperate with uvex, Lurz noted, including providing all the paperwork needed for effective monitoring. "Surprisingly, the will to support us in meeting the new requirements is more pronounced in Asia than in Europe," he said.

Larger European companies have been dismissive of their efforts, according to Schubert. "We source some of our basic materials from big European chemical companies. I don't think we'll ever be able to convince them to support our supply chain efforts on an EU-wide level." 

Europe set to follow

Following the introduction of the UK Modern Slavery Act, the French Duty of Vigilance Law, and Germany's Act on Corporate Due Diligence Obligations in Supply Chains, the European Commission in Brussels too decided to join the efforts to clean up corporate supply chains.

The EU's executive arm made the first proposal for European legislation in February this year and EU member states in December agreed in principle on drafting the details for the legislation.

The EU Draft Directive on Corporate Due Diligence appears to be even tougher than the German supply chain act. While the German law, for example, doesn't talk of civil liability in case of violations, the EU draft includes the possibility for individuals to go to the courts. In addition, corporations from outside the EU, garnering a yet unspecified amount of their revenue in the bloc, will also have to abide by the rules. 

This article was originally published in German.