Sustainability in Supply Chains

Global climate change is a fact and has been scientifically proven. It will have existentially threatening effects in social, economic, and ecological terms on the generations that come after us. Those who deny this need not read further at this point.

For all others, this white paper shows the interrelationships of the topic of sustainability and describes the requirements and obligations that companies face against the backdrop of the German Supply Chain Sourcing Obligations Act (LkSG) and the European Green Deal. 

For further information please send an email to

contact@xprts4xlnc.com

Sustainability – What is it?

The term sustainability has unfortunately been used very imprecisely by politicians and the media in recent years. This has resulted in a certain lack of clarity about what sustainability actually means. Many people equate the term with “long-lasting”. However, this is only partially correct, because otherwise a well-maintained, 30-year-old classic car with a pollutant-rich combustion engine would also be sustainable. The opposite is the case.

Sustainability or sustainable development is very precisely defined. It consists of the interaction of the 3 pillars of ecology, economy and social responsibility, with the aim of using the planet’s resources in such a way that the needs of the present generation can be satisfied without endangering the needs of future generations.

The meaning of sustainability for the 3 pillars can be described as follows:

Ecological sustainability: not overexploiting nature, not using more natural resources than can grow back, protecting the environment from destruction.

Economic sustainability: not to live beyond one’s means economically, to shape the economy in such a way that it can be operated in the long term.

Social sustainability: respecting human rights, creating societies with minimal social tension, resolving conflicts peacefully.

The principle of sustainability and the pursuit of its goals is often accompanied by 3 strategies:

  • Sufficiency: reduction of production and consumption.
  • Efficiency: more productive use of material and energy (e.g.: increase in output for the same input)
  • Consistency: environmentally compatible material cycles, recycling, waste avoidance

A wide variety of organizations, initiatives and NGOs have been pursuing the implementation of sustainable development for many years. One of the earliest and best-known initiatives is the United Nations Global Compact.  This was launched on January 31. 1999 by the then Secretary General Kofi Annan at the World Economic Forum in Davos. With the help of the International Chamber of Commerce (ICC), the first 50 global business enterprises were soon found to be participants. By mid-2018, some 13,000 participants had been found worldwide in more than 80 national networks. The German offshoot, the German Global Compact Network Foundation, includes 20 of the 40 DAX companies, among others.

The United Nations Global Compact has formulated the following 17 goals with a total of 169 detailed targets:

  1. End poverty
  2. Securing food
  3. Healthy life for all
  4. Education for all
  5. Gender equality
  6. Water and sanitation for all
  7. Sustainable and modern energy for all
  8. Sustainable economic growth and decent work for all
  9. Resilient infrastructure and sustainable industrialization
  10. Reducing inequality
  11. Sustainable cities and communities
  12. Sustainable consumption and production
  13. Take immediate action to combat climate change and its impacts
  14. Preservation and sustainable use of oceans and marine resources
  15. Protect terrestrial ecosystems
  16. Peace, justice and strong institutions
  17. Strengthen means of implementation and global partnership

Although the UN Global Compact is a success story in itself, its global impact is limited because it is based on voluntary action.

However, many countries have now enacted laws that make compliance with human rights and environmental protection binding for companies. In Germany, this includes the Act on Corporate Due Diligence in Supply Chains (Supply Chain Due Diligence Act – LkSG). This – in short: Supply Chain Act – is examined in detail in the next section.

Other countries have passed similar laws with regard to human rights compliance along supply chains. For example, France has the Loi de vigilance, the UK has the Modern Slavery Act, and the Netherlands has the Child Labor Due Diligence Law.

At the EU level, the EU Green Deal goes one step further. By 2050, Europe is to become the world’s first climate-neutral continent. As an interim goal, greenhouse gas emissions are to be reduced to 55% of 1990 levels by 2030.

All these measures, initiatives and laws pursue the goal of slowing down and ultimately stopping the further warming of the planet using the methods of sustainability in order to guarantee future generations a self-determined life without threats to their existence.

This, of course, has massive implications for industry, business and commerce. New requirements arise and entrepreneurial actions have to be reconsidered. This white paper aims to highlight the new requirements – especially with regard to the German Supply Chain Act and the EU Green Deal – and to provide recommendations for action.

The Supply Chain Due Diligence Act

The Act on Corporate Due Diligence in Supply Chains is a federal law that was passed by the Bundestag on June 11, 2021 and published in the Federal Law Gazette on July 22, 2021. It is part of the Civil Code as well as the Commercial Code and will enter into force on January 1, 2023. It initially applies to all companies based in Germany (head office or branch) regardless of their legal form, with 3000 or more employees. From January 1, 2024, it will also apply to companies with 1000 or more employees. As of December 31, 2021, there are 1347 companies in Germany with 3000 or more employees and 4291 companies with 1000 or more employees.

The most important aspects of this law and their impact on operations are outlined in this section.

The law regulates the due diligence of these companies and their supply chains with regard to the observance of human rights and environmental protection.

§3 of the Act defines the duties of care as follows:

(1) Businesses are required to exercise due regard for the human rights and environmental due diligence obligations set out in this section in their supply chains with the aim of preventing or minimizing human rights or environmental risks or ending the violation of human rights or environmental obligations.

Duties of care include, in particular:

  1. the establishment of a risk management system
  2. the definition of an internal responsibility
  3. the performance of regular risk analyses
  4. issuing a policy statement
  5. anchoring preventive measures in the company’s own business area and vis-à-vis direct suppliers
  6. taking corrective action
  7. Implementing risk due diligence with indirect suppliers; and
  8. documentation and reporting

In order to gauge the impact of these due diligence requirements on the operational activities of companies, it is first necessary to consider the most important definitions of terms. These are regulated in §2 of the law.

Supply Chain

The supply chain within the meaning of this law refers to all products and services of a company. It includes all the steps, both at home and abroad, required to manufacture the products and provide the services, starting from the extraction of the raw materials to the delivery to the final customer, and covers

1. the actions of a company in its own business area,

2. the actions of a direct supplier, and

3. the actions of an indirect supplier.

Own Business Area

For the purposes of this Act, a company’s own area of business covers any activity undertaken by the company in order to achieve the company’s objective. This includes any activity for the manufacture and exploitation of products and the provision of services, irrespective of whether it is carried out at a location in Germany or abroad. In affiliated companies, the parent company’s own business operations include a company belonging to the group if the parent company exercises a determining influence on the company belonging to the group.

Direct Supplier

For the purposes of this Act, a direct supplier is a party to a contract for the supply of goods or the provision of services whose supplies are necessary for the manufacture of the company’s product or for the provision and use of the service in question.

Indirect supplier

An indirect supplier within the meaning of this Act is any company that is not a direct supplier and whose supplies are necessary for the manufacture of the company’s product or for the provision and use of the relevant service.

In concrete terms, this now means that all companies covered by this law are liable for violations of human rights as well as the environmental protection in

  1. their own business
  2. that of their direct suppliers, and
  3. that of their indirect suppliers

Due diligence further means that each affected company must (1) designate a responsible person, (2) issue a policy statement, (3) establish a risk management process with respect to this law and immediately use it to (4) conduct a risk analysis, (5) define and implement preventive and remedial measures and review their (6) effectiveness, and finally (7) document and report everything.

All these obligations are very reminiscent of the requirements of ISO 9001 management systems, so it can be assumed that the effort and scope of implementing the due diligence obligations of the Supply Chain Act will be similar to that of ISO 9001 certification. There is already a separate standard for the supply chain due diligence law, ISO 37301 (Compliance Management System). Furthermore, companies can voluntarily be certified according to SA8000.

All of this must happen in the calendar year 2022. Companies that have not yet taken action in this regard will feel significant resource and time pressure here. No later than 4 months after the end of the fiscal year, a report must be prepared and made public via the company’s website, containing the following elements:

  1. whether and, if so, which human rights and environment-related risks or violations of a human rights-related or environment-related duty the company has identified,
  • what the company, […] has done to fulfill its due diligence obligations; this includes the elements of the policy statement as well as the measures taken by the company in response to complaints,
  • how the company evaluates the impact and effectiveness of the measures and
  • what conclusions it draws from the assessment for future action.

If the company has not identified any human rights or environment-related risk or violation of a human rights-related or environment-related obligation and has plausibly stated this in its report, no further elaboration is required.

In addition to publication, the report must also be submitted to the Federal Office of Economics and Export Control (BAFA).

The BAFA is the responsible control authority that examines the reports and takes action if necessary. It acts according to the text of the law (§14 (1) ):

1. ex officio according to dutiful discretion,

(a) to monitor compliance with the obligations under sections 3 to 10 (1) with respect to potential human rights and environmental risks and violations of a human rights-related or an environmental obligation; and

(b) detect, remedy, and prevent violations of duties under subparagraph (a);

2. upon request, if the person making the request makes a substantiated claim,

  1. being injured in a protected legal position as a result of the non-fulfillment of an obligation contained in §§ 3 to 9, or

(b) that a violation referred to in subparagraph (a) is imminent.

BAFA is responsible for monitoring compliance with the due diligence requirements, identifying violations as administrative offenses, ordering measures and, if necessary, imposing coercive penalties or fines. In doing so, it has rights of access to the company concerned (§16) and the company concerned has extensive obligations to provide information and surrender (§17) as well as obligations to tolerate and cooperate (§18).

The law further requires the company to establish an appropriate internal corporate grievance procedure.

Section 8, paragraph (1), sentence 2 states:

The complaints procedure enables persons to point out human rights and environment-related risks as well as violations of human rights-related or environment-related obligations that have arisen as a result of the economic actions of a company in its own business sector or of a direct supplier.

Furthermore, §9, para. (1) states:

The company must set up the complaints procedure in accordance with § 8 in such a way that it also enables persons to point out human rights or environmental risks as well as violations of human rights-related or environmental obligations that have arisen as a result of the economic actions of an indirect supplier.

This “Whistleblower Policy” means de facto that companies are obliged to act if, as a result of a complaint, you have been made aware of a violation of human rights-related or environmental obligations within your own company, within a direct supplier or within an indirect supplier. It is easy to imagine what this can mean for companies as a consequence.

Failure to comply with or breach of the duty of care is sanctioned with severe coercive penalties and fines:

  • with a penalty payment of up to € 50,000, which is twice the regular administrative enforcement rate
  • with a fine of up to € 800,000 or
  • with a fine of up to 2% of the average annual turnover (of the last 3 financial years) for companies with an annual turnover of more than € 400 million

It is therefore urgently recommended that this new law be taken very seriously and that the due diligence requirements be implemented without delay.

The complete and valid text of the law can be found in the Federal Law Gazette No. 46 as of 22.7.2021.

To illustrate the potential impact of the law, several realistic case studies are outlined below.

Case study 1:

German machine builder H, which is covered by the Supply Chain Act due to its size, procures its entire requirements of screws, nuts and washers from German wholesaler W, which is also covered by the Act due to its size. The latter has its machine elements manufactured by a contract manufacturer in India. It turns out that there are deficiencies in occupational safety there. It is now not only the wholesaler W who has to exercise due diligence, but also the machine manufacturer H. Both have to define the necessary remedial measures within the framework of the supply chain law, ensure their implementation and provide evidence of their effectiveness.

Case Study 2:

Food retail chain E, which is subject to the Supply Chain Act, procures some of its fruit and vegetable requirements from producer M in Spain. A team of investigative journalists from Bavarian radio discovers that illegal migrants are being employed there in undeclared work, without social security and without adequate occupational health and safety, and informs the retail chain E about the conditions as part of the complaints procedure. E must now take immediate action and define and implement remedial measures, if necessary up to and including termination of the supplier relationship, and check their effectiveness.

Case study 3:

German automotive supplier C, which is subject to the Supply Chain Act due to its size, procures electronic control modules from a manufacturing service provider P in the Czech Republic. The latter procures a certain auxiliary material required for production from a manufacturer Q in Malaysia who uses small quantities of persistent organic pollutants in his manufacturing processes. Although P is not directly subject to the Supply Chain Act, C is responsible for rectifying the grievance.

Case study 4:

The Swedish fashion label H, which employs more than 3,000 people in its retail stores in Germany, has its textiles produced in Turkey by company T. The latter procures fabrics for the sewing shop from a Pakistani family company F. Children under 14 are employed there. The latter procures the fabrics for the sewing shop from a Pakistani family business F. Children under the age of 14 are employed there. H is responsible for stopping the violation of human rights and occupational health and safety.

Appendix:

List of agreements that define human rights and environmental protection:

  • Conventions No. 29 (including Protocol), No. 87, No. 98, No. 100, No. 105, No. 111, No. 138 and No. 182 of the International Labor Organization (written down in various federal law gazettes)
  1. International Covenant of December 19, 1966 on Civil and Political Rights, (Federal Law Gazette 1973 II pp. 1533, 1534)
  • International Covenant of December 19, 1966 on Economic, Social and Cultural Rights (BGBl. 1973 II p. 1569, 1570)
  • Minamata Convention on Mercury of October 10, 2013 (BGBl. 2017 II p. 610, 611) (Minamata Convention).
  • Stockholm Convention of May 23, 2001 on Persistent Organic Pollutants (BGBl. 2002 II p. 803, 804) (POPs Convention), as last amended by the resolution of May 6, 2005 (BGBl. 2009 II p. 1060, 1061)
  • Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and their Disposal of March 22, 1989 (Federal Law Gazette 1994 II pp. 2703, 2704) (Basel Convention), as last amended by the Third Ordinance Amending Annexes to the Basel Convention of March 22, 1989 of May 6, 2014 (Federal Law Gazette II p. 306/307).

Weblinks:

https://www.csr-in-deutschland.de/EN/Business-Human-Rights/Supply-Chain-Act/supply-chain-act.html
https://www.csr-in-deutschland.de/EN/Business-Human-Rights/Implementation-support/implementation-support.html

The EU Green Deal

The EU Green Deal stems from an initiative of the European Commission, the concept of which was presented on Dec. 11, 2019, and elaborated in detail by June 30, 2021. Based on the 2015 Paris Agreement (COP 21), the Green Deal essentially pursues two goals:

  • The climate neutrality of the EU by 2050 and as an intermediate step
  • The reduction of anthropogenic greenhouse gas emissions to 55% of 1990 levels.

A further interim target has been proclaimed for 2040, but this has not yet been specified. The legal basis for the Green Deal is Regulation (EU) 2021/1119 of the European Parliament and of the Council, which was adopted on June 30, 2021 and entered into force on July 20, 2021.

The regulation is based on 40 climate change considerations and describes in 14 articles the procedure for implementing and monitoring the measures to be taken to achieve the targets. EU regulations are binding within the Union and therefore have the character of a law.

So much for the good news.

Less well is that the regulation does not describe the measures themselves in detail, but only refers to the fact that measures must be taken both to reduce emissions of anthropogenic greenhouse gases and to reduce greenhouse gases in the atmosphere in order to produce net zero emissions in the EU in 2050.

In defining and implementing the measures, the subsidiarity principle enshrined in the EU Treaty applies, which states that the level of regulatory competence should always be “as low as possible and as high as necessary”. In concrete terms, this means in the present case that the definition and implementation of measures will take place at least at the national level, and possibly also at the regional or municipal level.

The regulation’s timeline calls for the EU Commission to issue “guidelines setting out common principles and procedures for identifying, classifying and prudentially managing significant physical climate risks in the planning, development, implementation and monitoring of projects and programs” by July 30, 2022.

By Sept. 30, 2023, the progress and effectiveness of measures, including national measures, toward achieving the goals will then be evaluated for the first time – and every 5 years thereafter.

This means that legislation supporting the goals of the EU Green Deal must be put in place in EU countries between July 30, 2022 and September 30, 2023 at the latest.

Since in most member states there is still no consistent legal situation for implementation, apart from CO2 equivalent pricing, it is not yet entirely clear what requirements will be imposed on companies in this respect. However, it is highly likely that

  1. Companies will be required to report on their greenhouse gas emissions.
  2. Proof of measures and their effectiveness with regard to climate neutrality must be provided on a regular basis

Companies that are already on the path to climate neutrality will not be surprised by the upcoming legislation, but those that are not will probably be.

In this context, it is important to consider exactly what the path to climate neutrality might look like. It certainly starts with an analysis of a company’s current status with regard to its greenhouse gas emissions or its ecological footprint. And in doing so, it is not enough to look at the company’s total energy consumption and the origin of the energy required. Rather, it will be necessary to break down the footprint to manufacturing and business processes and, above all, to products.

It becomes particularly complex with products, because the entire product life cycle must be recorded. It is not only a matter of recording the footprint during product creation and distribution (gate-to-gate), but also that of the materials and raw materials used, as well as that created when the product is used and recycled at the end of its life (cradle-to-cradle). This meets the goal of the circular economy, which is also enshrined in the EU Green Deal. A huge factor here is product development. This is where not only the economic success of a product (design for supply chain) but also its ecological success (design for climate) is decided.

It therefore makes sense for companies to start thinking today about how they can record and analyze the ecological footprint of their products over their entire life cycle, as well as their processes – and this is not just about manufacturing processes – and introduce measures to reduce it.

However, the sum of the ecological footprints of products and processes does not yet add up to the overall footprint of the company. For this, you also have to ask yourself questions such as

  • What is the environmental footprint of our work equipment such as laptops, cell phones, etc.?
  • How do our employees get to work?
  • What is the environmental footprint of our indirect consumables such as paper, toner, water, wastewater, etc.?
  • How and where does the food for the canteen and kitchenette come from?
  • etc.
  • etc.

The list can be continued at will, because the matter is arbitrarily complex. In order not to get lost in the details here, one should therefore also think about the second step towards climate neutrality, which can compensate for these “small” polluters: the creation of CO2 sinks that remove greenhouse gases from the atmosphere. This can be done through simple measures that can be implemented quickly, such as greening the flat roofs of company buildings or planting greenery on unused company land. Or one can support one of the numerous existing initiatives such as the protection of the tropical rainforest with financial means. Here, too, there are no limits to creativity and energy.

The third step is finally the trade with certificates (emission rights trade). With this, one can either buy the last remnants of climate neutrality, or earn money with it.

The most important question in this set of issues that a company’s leadership should ask is why.

Why do we do what we do for climate neutrality? Because we have to, or because we want to? If the latter is the answer, pure conviction for ecological responsibility often suddenly gives rise to opportunities for economic success. And often in areas that were not even thought of before.

If a company is committed to climate neutrality because it has to – and tries to capitalize on it – then it is doing nothing more than greenwashing. The market notices this and does not reward it.

Recommendation for action

The most important recommendation for action for the two sub-aspects of sustainability in supply chains described in this white paper is: act now!

However, as the topics of the Supply Chain Act and the EU Green Deal differ in their objectives, the recommendations for action for both topics are listed separately here.

Recommended action for the Supply Chain Act

  • Provide resources. Regardless of whether you as a company are affected from 1/1/2023, or from 1/1/2024, or if you are a direct supplier to the above. Designate an officer within the company and give him/her the resources (funding, staff, etc.) needed to successfully implement the program.
  • Create a staff position for this responsibility. Hanging the matter “on the purchasing department” would be the wrong way to go.
  • Start today. Not tomorrow, next month or in half a year. Time is running out and one year for such a measure is not a long time.
  • Inform your workforce of the obligations that fall on the company under the Supply Chain Act.
  • Inform your immediate suppliers about your plans and strive for close cooperation with them on this issue from the very beginning. Simply requesting a supplier declaration is not enough here.
  • Start with risk analysis in-house. Apply the findings to your immediate suppliers.
  • Prepare to audit not only your direct suppliers but also your indirect suppliers. Create an audit plan.
  • Prepare your reporting requirements. Both in terms of content and infrastructure.
  • Provide a sufficient budget.
  • Get external support if necessary

Recommendation for action for the EU Green Deal

  • Again, make resources available. Designate a responsible person in the company and give him/her the resources (financial, personnel, etc.) that they need for the path to climate neutrality.
  • Take climate neutrality seriously. Formulate it as a corporate goal in your business ethics.
  • Take your cue from others. There are already a large number of companies today that are climate-neutral or will soon be. Learn from others in the sense of best practice sharing.
  • Create a staff position for the climate neutrality project.
  • Inform your workforce about the new corporate goal. Encourage all employees to actively participate.
  • Start today. Not tomorrow, next month or in half a year.
  • Inform your suppliers about your project and communicate your expectations in this regard to the supply chain.
  • Define and launch pilot projects in-house with the active participation of your employees.
  • Train your employees on the subject. Especially those who are involved in product development. This is where the foundations for climate neutrality are laid.
  • Start analyzing the situation where the fastest successes are likely to be achieved, e.g. in production.
  • Set aside a sufficient budget.
  • Get external support if necessary

We at xprts4xlnc have vast experience in modeling sustainable business processes and sustainable supply chains. We are happy to support you on your journey through the jungle of supply chain law and into climate neutrality. We also work with renowned partners in this area. Our portfolio ranges from pure strategy consulting to the complete implementation of projects in this area.

Feel free to contact us at any time at

contact@xprts4xlnc.com

or by telephone under

+49 0172 7830512

+49 152 33818003

About xprts4xlnc

Thurner & Suadicani Unternehmensberater Partnergesellschaft was founded in 2017 by merging the former thurner consulting and Suadicani Consulting into a new company with the label xprts4xlnc (“experts for excellence”). The founders bring complementary skills and knowledge from almost 70 years of combined professional experience.

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Automatisch generierte BeschreibungJuergen Thurner brings 34 years of experience in various senior management positions at companies such as Hewlett-Packard, Sanmina, M-Flex and Flextronics. He is a lecturer in International Operations Management at the European School of Business at Reutlingen University. His core areas of expertise are supply chain design, business process modeling and supply chain sustainability. His other areas of expertise include Industry 4.0 / Smart Factory, the Internet of Things and digital transformation.

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Automatisch generierte Beschreibung

Robert Suadicani builds on a proven successful career in the automotive industry, where he has worked for companies such as Mercedes-Benz do Brasil, MAN and Knorr-Bremse SfS, to name a few. He specializes in all aspects of quality and risk management. Robert Suadicani is a certified EOQ and VDA 6.3 auditor and an experienced coach for sustainable business process management and lean management. He brings 35 years of professional experience to the table.

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