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Act on Corporate Due Diligence Obligations in Supply Chains

Luana offers documentation support in the field of photovoltaics

In times of increasing environmental awareness and growing pressure on companies to act socially and ecologically responsibly, the Act on Corporate Due Diligence Obligations in Supply Chains (in German: Lieferkettensorgfaltspflichtengesetz, LkSG) is coming into focus more and more. Especially in the context of the photovoltaic industry, this law offers an opportunity to encourage companies to act more responsibly while supporting the development of renewable energies.

The German Act on Corporate Due Diligence Obligations in Supply Chains obliges companies to carefully check their supply chains to ensure that there are no violations of human rights, environmental or social standards. This applies not only to direct suppliers but also to their indirect suppliers in a globalized economy. In the photovoltaic industry, which is heavily reliant on international supply chains, these requirements play a significant role and are challenging for many photovoltaic suppliers to implement.

Luana provides information about the Act on Corporate Due Diligence Obligations in Supply Chains and presents in this post specifically how we can support you in meeting due diligence obligations.

What is this about?

A German law to prevent human rights violations & environmental destruction

The Act on Corporate Due Diligence Obligations in Supply Chains (in German: Lieferkettensorgfaltspflichtengesetz, LkSG) is a law that obliges companies above a certain size to prevent and remedy human rights violations and environmental degradation along their supply chain.

When did the law come into force?

For companies with at least 1,000 employees since January 1, 2024

On June 11, 2021, the Act on Corporate Due Diligence Obligations in Supply Chains was passed by the German Bundestag. The aim of the law is to improve the international human rights situation by setting out requirements for the responsible management of supply chains, with due diligence obligations graded according to the companies‘ ability to exert influence. The law has been in force since January 1, 2023 for companies based in Germany and companies with a branch office pursuant to Section 13d of the German Commercial Code (HGB) with at least 3,000 employees in Germany. Since January 1, 2024, it has also applied to companies with at least 1,000 employees.

In addition, the European Commission presented a proposal for an EU-wide “Supply Chain Directive” on February 23, 2022: Corporate Sustainability Due Diligence Directive (CSDDD). This is based on the French “loi de vigilance” and the German LkSG and contains environmental and human rights due diligence obligations as well as the obligation for large companies to draw up a “climate plan”. According to the draft, obligations relating to the protection of biodiversity, endangered species and the ozone layer are to apply in addition to the environmental due diligence obligations regulated in the LkSG. The final adoption of the law is still pending (as of April 2024).

Sources:
German Commercial Code (HGB) (Section 13d: Seat or Main Office Abroad)
Federal Ministry for Economic Affairs and Climate Action (Press release)

To whom does the law apply to?

To companies with at least 1,000 employees with their registered office or branch in Germany

The law initially applied to companies with 3,000 or more employees, but since January 2024 it has also applied to companies with 1,000 or more employees with a registered office or branch office in Germany in accordance with section 13d German Commercial Code (HGB). The so-called “per capita principle” and the general employee definition of section 611a German Civil Code (BGB) apply to the number of employees. This does not differentiate between part-time and full-time employees.

Sources:
Federal Ministry of Labour and Social Affairs (Section 3: The scope of application of the Act)
German Commercial Code (HGB) (Section 13d: Seat or Main Office Abroad)
German Civil Code (BGB) (Section 611a: Employment contract)

Who checks compliance?

The Federal Office of Economics & Export Control

The Federal Office of Economics and Export Control (BAFA) checks the company reports and investigates complaints submitted. The specific tasks of the BAFA in relation to the Act on Corporate Due Diligence Obligations in Supply Chains include:

Checking whether companies are complying with their reporting obligations,
execution of controls,
detecting, eliminating and preventing violations and…
…the imposition of fines and penalties.

Source: Federal Office of Economics and Export Control (BAFA)

What happens in the event of violations?

Imposition of fines and penalties

If companies fail to comply with their obligations to carry out a risk analysis, set up a complaints procedure, take preventative measures and effectively remedy known human rights violations, they may face fines of up to 8 million euros or up to 2 percent of their annual turnover. The turnover-related fines only apply to companies with an annual turnover of more than 400 million euros. However, there is no newly regulated civil liability for companies. The existing civil law regulations on liability under German and foreign law continue to apply.

Source: Federal Ministry of Labor and Social Affairs (Page 18)

What exactly do companies need to do now?

Among other things, present documentation

The due diligence obligations relate to the company’s own business area, the actions of a contractual partner and the actions of other (indirect) suppliers. The Federal Office of Economics and Export Control (BAFA) has issued FAQ on this subject. There is no specific reference to the photovoltaic industry. The following is defined as a supply chain:

“The supply chain within the meaning of the law refers to all products and services of a company. It includes all steps in Germany and abroad that are necessary for the manufacture of products and the provision of services, from the extraction of raw materials to delivery to the end customer, and covers

the actions of a company in its own business area,
the actions of a direct supplier and…
…the actions of an indirect supplier.

This also includes the use of necessary services, such as the transportation or temporary storage of goods.”

This means that companies‘ responsibility no longer ends at their own factory gates, but extends along the entire supply chain. Companies must first identify the areas in their own business operations and those of their direct suppliers that pose particularly high human rights and environmental risks.

The due diligence obligations include:

The establishment of a risk management system and the performance of a risk analysis,
the adoption of a declaration of principles for the corporate human rights strategy,
the establishment of preventive measures,
taking immediate remedial action in the event of identified violations,
the establishment of a complaints procedure and…
…the obligation to document and report on the fulfillment of due diligence obligations.

Source: The Federal Office of Economics and Export Control (BAFA) (FAQ)

How does Luana support you?

By handing over all certificates

We have all documentation at our disposal, which is not limited to our direct suppliers (e.g. manufacturers of lightweight photovoltaic modules, power inverters or base structures), but we also check the legally relevant documents of our indirect suppliers (e.g. transport companies).

Nico Behns, Head of Operations Luana AG, adds to this:

“Regardless of the type of energy project you are implementing with us—whether it’s the construction of a CHP unit for a housing estate or the installation of an energy center with anti-reflective lightweight photovoltaic modules for an airport: We provide you with a folder containing all the documents you need to ensure complete documentation along the entire supply chain.”