Potential Impact on Sri Lankan Companies

CEYLON TODAY | Published: 2:00 AM Nov 30 2021

WHAT IS THE LAW ALL ABOUT?

On 11 July 2021, the German Parliament passed a legislation on ‘corporate due diligence in supply chains’ (the so-called Sorgfaltspflichtengesetz), which requires Companies that fall under the scope of this law to take steps to prevent human rights violations throughout their supply chains. The due diligence legislation establishes an obligation to make an effort and not an obligation to succeed. 

Companies do not have to guarantee that no human rights and environmental violations occur in their supply chains. Rather, Companies must be able to demonstrate that they have implemented due diligence measures set out in the law that are feasible and appropriate given their individual context. More specifically, Companies shall set up a due diligence process covering their supply chain. 

This entails seven core elements.

POLICY COMMITMENT

The adoption of a human rights policy statement at the management level, containing: a description of the due diligence procedure, main human rights and environmental risks identified through the risk analysis and the human rights and environmental expectations the Company has towards its employees and suppliers.

HUMAN RIGHTS RISK MANAGEMENT SYSTEM

The establishment of an effective risk management system in all relevant business processes to identify human rights and environmental risks and to prevent, minimise or end violations if the Company has caused or contributed to them within the supply chain. This includes: The appointment of a responsible person for monitoring risk management system, a human rights officer. Conducting a risk analysis to identify human rights and environmental risks (at least once a year and on an ad-hoc basis), at own business area and direct suppliers.

MEASURES TO ADDRESS HUMAN RIGHTS RISKS

The adoption of appropriate measures to address the risks identified at own business area and at direct suppliers. The effectiveness of the measures shall be assessed annually and on an ad-hoc basis. Measures at own business area include the implementation of a human rights strategy across the organisation, procurement strategies and purchasing practices that avoid and mitigate risks, employee training, and control measures to verify compliance. 

Measures vis-à-vis direct suppliers encompass selection of suppliers according to human rights and environmental considerations, contractual assurance by a direct supplier to comply with the expectations and address them vis-à-vis its suppliers, training to enforce contractual assurance, and control measures to verify compliance.

REMEDIAL ACTION FOR HUMAN RIGHTS VIOLATIONS

Taking remedial action where violations had occurred in the supply chain and review it annually on an ad-hoc basis. In the case where the Company determines occurred or imminent violation at own business area, the Company shall take immediate remedial action. In the case of direct suppliers and if the Company cannot end the violation, action to minimise it should be taken through the development of a concept (a plan) with concrete timeline. 

The areas must be considered are: The joint development and implementation of the remediation plan with the Company that causes the violation, joining forces with other Companies as part of industry initiatives and standards to increase influence on the perpetrator, and temporary suspension of the business relationship during risk minimisation efforts. Termination of the business relationship shall only be required under specific circumstances and as ultima ratio.

INTERNAL COMPLAINTS PROCEDURE

Establishing an internal complaints procedure for persons who are directly affected by the economic activities of the Company or of a direct supplier; or persons who are aware of a possible violation and want to point it out. The Companies should consider establishing written rules about the procedure and guarantee impartiality and independence. Clear and comprehensive information on accessibility and on the implementation of the procedure must be publicly available. Accessibility to potential users, confidentiality and protection against retaliation must be ensured. The effectiveness of the procedure shall be revised annually and on an ad-hoc basis.

The complaint mechanism must also be open to persons whose rights by economic activities of an indirect supplier have been affected or persons who have knowledge of a possible violation and want to point it out. Companies can also participate in an external complaint procedure (e.g. driven by industry initiatives) provided the above-mentioned criteria are met.

DUE DILIGENCE AT INDIRECT SUPPLIERS

If the Company has ‘substantiated knowledge’ (i.e. factual indications through the complaint procedure, its own findings, competent authority, human rights reports, or other sources) of a possible violation, the Company shall conduct due diligence in this regard (including risk analysis, adoption of measures, development, and implementation of a concept for minimisation and the update of the policy, if necessary).

REPORTING DUE DILIGENCE ACTIVITIES

Annual reporting on their due diligence activities, covering at least the following: whether identification of human rights and environmental risks has taken place, and if so, which of the ones, the activities aimed to fulfil the due diligence obligations, how the company assesses the impact and effectiveness of the measures; and what conclusions it draws from the assessment for future action.

The report shall be public and available free of charge on the Company’s website. The due diligence obligations shall be continuously documented within the Company and this documentation obligation includes a retention period of seven years.

CURRENT LEGAL STATUS

Companies headquartered or registered in Germany with more than 3,000 employees must meet their due diligence obligations set out in the law as of January 1, 2023 (and Companies with more than 1,000 employees as of 2024). Employees include temporary workers as well as the employees of all affiliated Companies.

The Law has been passed by the German Parliament in June 11, 2021 and will be enforced in January 2023. This means that German Companies need to start setting up or revising their due diligence processes against the requirements of the law this year and the next.

ENFORCEMENT OF THE LAW

The Federal Office for Economic Affairs and Export Control (BAFA) will be the responsible body for the official enforcement of the law. The Law envisages administrative fines that include: depending on the type of violations of the due diligence obligations set out in the law, Companies can face fines of up to €800,000, fines up to two percent of the Company’s average annual global turnover for Companies with average annual turnover of more than €400 million for certain violations, e.g. for failing to take remedial action or failing to take it in a timely manner. Finally, Companies can be excluded from the award of public contracts for a period up to three years in the event of a fine being imposed (of at least €175,000).

POTENTIAL IMPACT OF THE LAW ON COMPANIES IN SRI LANKA

The law will oblige German Companies to set up a due diligence process covering not only the companies’ operations but also their direct suppliers. The latter might lead to an increase and tightening-up of requirements mirrored by additional policies, requests and/or the incorporation of contractual clauses to be accepted by Sri Lankan business partners and suppliers.

What does that mean in practice?

Increase Visibility & Transparency Commit to Human Rights and Environmental Requirements;

German Companies will be required to identify their human rights and environmental risks at their suppliers (not only direct but in certain circumstances also indirect ones). This means that Sri Lankan Companies should be prepared to disclose relevant information on their risks in their own operations but also further down the supply chain. German Companies will be required to request their direct suppliers, through e.g. contractual clauses, to comply with human rights and environmental requirements in their own operations and address them appropriately along the supply chain. 

This means that Sri Lankan companies should be prepared to comply with human rights and environmental expectations and address them appropriately vis-à-vis their own suppliers.

Increase Monitoring & Establish Measures and Processes to Address Your Risks

German companies will need to have monitoring and control mechanisms in place to ensure that human rights and environmental requirements are met and respected. This means that Sri Lankan Companies should be ready to undergo on-site inspections, social and environmental audits and be assessed against international standards such as ILO that might be stricter than national law.

Reinforce Complaint Mechanisms

The law requires German Companies to have complaints mechanisms in place that cover their own employees but also workers at direct suppliers. The draft law envisages that the complaint mechanism should also reach potentially affected people further down in the supply chain. 

This means that Sri Lanka Companies might be required to communicate to their own workers the available complaint mechanism set up by their German business partner/client, but also to set their own mechanism to increase outreach and request the same from their own suppliers.

Löning-Human Rights & Responsible Business for the Indo-German Chamber of Commerce, Mumbai

CEYLON TODAY | Published: 2:00 AM Nov 30 2021

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