New challenges ahead – The Lieferkettensorgfaltspflichtengesetz

Written by Philip Brossette Ulrich Benz & Juergen Puhane

“What’s good for the planet is good for business” was a clear statement made during the World Economic Forum Annual Meeting 2020 in Davos.

This statement emphasizes again that companies ignoring climate change will be at risk. These can vary from market or reputational to regulatory risks where firms could lose their license to operate or be sentenced to high fines. More importantly, sustainability is not only about losing money or gaining market share it is the task of our generation to keep this planet safe and healthy for the the generations to come.

To take concrete action on climate, sustainability and equality the European Union and in this case, Germany decided to manifest precise measures for companies in a law, namely the “Lieferkettensorgfaltspflichtengesetz” (Supply Chain Transparency Act) or short LkSG. In the subsequent blog we elaborate in detail, what it entails and how SAP can enable companies to be compliant with it.

Lieferkettensorgfaltspflichtengesetz (LkSG) aka Supply Chain Transparency Act

According to the Ministry for Economic Cooperation and Development in Germany, less than 20% of companies in Germany fulfill their corporate due diligence obligations, thereby potentially allowing child labor and work in precarious conditions. In part to address this grievance, Germany passed the “Lieferkettensorgfaltspflichtengesetz” – Supply Chain Transparency Act in May 2021. It is a first step on national basis, but similar laws are also expected at the European level.

The LkSG entails far-reaching new obligations impacting the management of affected companies, which we will depict in detail in the next paragraph.

Focus topics of the LkSG – a detailed analysis

What is happening?

Germany’s federal government decided to globally strengthen human rights and environmental protection in the supply chain, starting 2023.

Who does it effect?

It is legally binding for all German entity with more than 3.000 employees (including part-time worker). A policy and reporting structure needs to be established for own business units, direct and indirect suppliers. In 2024 the law will be effective for companies with >1.000 employees.

What are the potential consequences?

The risk of penalties and fines for misconduct can range up to 2% of annual revenues
Exclusion from public tenders for up to 3 years
Cost of policy implementation: People, IT-Tools, Monitoring, Reporting

The compliance of the law is ensured/controlled by the “Bundesamt für Wirtschaft und Ausfuhrkontrolle” – BAFA

Content of the law

Risk analysis (§ 5 LkSG)

Identification, evaluation & prioritization of risks
Knowing the effects of business activity on human rights & the environment
Update on regular basis & occasion related

Align company policy (§ 6 Para. 2 LkSG)

Description of risk management
Presentation of relevant risks
Expectations of employees and suppliers

Preventive measures (§ 6 Para. 1,3,4, LkSG)

Clear description of the human rights strategy
Implementation of human rights strategy
Implementation of aligned procurement strategies and purchasing practices

Complaint’s procedure (§ 8 LkSG)

Set up internal and external possible complaints mechanisms, allowing information to be provided by those affected
Regular updates on recorded complaints

Review:

Implementation of risk-based control measures in the own business area
Agreement on contractual control mechanisms vis-à-vis direct suppliers

Remedial action (§ 7 LkSG)

Creation of corrective action plans
In the event of serious or repeated violations (despite preventive measures undertaken), termination of business relations with the business partner is necessary as a last resort
Effectiveness tests

Documentation and Reporting (§ 10 LkSG)

Ongoing transparent documentation for the fulfillment of the duty of care
Annual public report (no later than 4 months after FY)

SAP as an Enabler for due diligence compliance

The responsibility for companies to operate in an ethically correct and socially responsible manner is once again underlined by the new law. An IT solution with established standards can help meet this responsibility and automate processes.

SAP software provides holistic support for the realization of a company-wide sustainability and social compliance strategy.

The following illustration shows how SAP can enable companies to remain compliant with the requirements of the LkSG law.

As can be seen in the illustration SAPs approach to tackle the requirements of the law is a holistic E2E process approach. Most of the LkSG requirements can already be covered by Strategic Procurement modules like SAP Ariba Supplier Lifecycle & Performance, the SAP Ariba Supplier Risk and the SAP Business network.

With the SAP Supplier Risk module, supplier events, rankings or external partner information can be actively monitored with audits (e.g., Ecovadis, Dun & Bradstreet, Made in a Free World etc.), if necessary. In any case, this ensures that a purchasing manager is always informed about the supplier base and potential emerging risks according to the LkSG in the supply chain. With the SAP Business Network, we ensure that global deliveries are always transparent and traceable, thus ensuring a complete line of custody for used products. In combination with blockchain technology, we can trace the origin of various partners along the value chain.

Collected Data can then be used to formulate necessary reports and as a basis for taking action in case of LkSG violations.

All of the above-mentioned modules & capabilities combined can be extended with industry and standard functionalities from the SAP Core (e.g. SAP S/4HANA) to be even closer aligned to existing business processes and hence form a perfect fit for helping customers to be compliant with the LkSG.

Conclusion

The responsibility for companies is certainly very high, ethically, socially and monetarily. Software alone cannot take this away. However, today’s technology and established standards provide important technical and digital support to meet this responsibility. In doing so, they comply with legal requirements and enable transparency in supply chains for end consumers.

SAP continuously develops its solutions to always reflect current and future legal regulation, so businesses can continue managing all aspects of their procurement without disruptions. As described in the blog above, customers can reduce their administrative efforts of complying with LkSG – Supply Chain Transparency Act and meet their legal requirements seamlessly by leveraging SAP Solutions like SAP Ariba or SAP S/4HANA.

Feel free to contact us if you want to more about the LkSG.

Stay safe & healthy

Jürgen, Ulrich & Philip

Further read:

CSR in Deutschland:

https://www.csr-in-deutschland.de/DE/Wirtschaft-Menschenrechte/Gesetz-ueber-die-unternehmerischen-Sorgfaltspflichten-in-Lieferketten/Hintergrund/hintergrund-und-entwicklung.html

Deloitte Lieferkettensorgfaltspflichtengesetz:

https://www2.deloitte.com/content/dam/Deloitte/de/Documents/audit/Deloitte-Umsetzung-Lieferkettensorgfaltspflichtengesetz-LKSG.pdf

Bundesminsterium für wirtschaftliche Zusammenarbeit und Entwicklung FAQ´s Lieferkettensorgfaltspflichtengesetz:

https://www.bmz.de/de/entwicklungspolitik/lieferkettengesetz

SAP Business Network:

https://www.sap.com/germany/products/business-network.html