ESG criteria and the Act on Corporate Due Diligence Obligations in Supply Chains (LkSG)

As part of European regulatory efforts to promote sustainable growth, the EU has issued some key regulations with further ones being planned. At the heart of these new regulations is mandatory reporting according to ESG (Environmental, Social, Governance) criteria as well as a uniform classification system (EU taxonomy). By increasing transparency in as many areas as possible, both the financial sector and other industries are to be held more accountable for achieving environmental and social sustainability goals.

The German legislator has already taken action in an area that will have a direct impact on many companies as early as 2023:

Supply chains and their chain links have long been associated with scandals and disasters. A sad example is the fire that broke out in a textile factory in Bangladesh in 2013. Such incidents are often triggered by unreliable business partners, who German suppliers work with on a more or less unchecked basis. To date, there is no legal obligation in Germany to carry out due diligence of contractual partners or to set up an effective compliance management system, with the exception of certain special materials (e.g. conflict minerals). The German legislator now intends to remedy this situation. The aim is to establish appropriate due diligence requirements to ensure compliance to human rights and environmental standards across the entire supply chain.

According to the act passed by the Bundestag on June 11, 2021, the "Act on Corporate Due Diligence for the Prevention of Human Rights Violations in Supply Chains - LkSG" will come into effect in two stages: For companies in Germany with over 3,000 employees, it will apply from January 1, 2023 and for companies in Germany with over 1,000 employees, from January 1, 2024.

In terms of the material scope of its application, the act focuses on risks to human rights and environmental risks in the respective supply chains. To this end, companies must meet due diligence requirements and take preventive measures not only in their own area of business, but also in respect of direct suppliers and, if necessary, take preventive measures in respect of indirect suppliers.

In addition, the Commission of the European Union is preparing its own directive, which, after a review of the initial drafts, goes far beyond German domestic law.
 

 How we can help

• Structuring and carrying out risk analyses
• Analysis of supplier structures and supplier communication
• Business partner compliance due diligence
• Synchronisation of supplier management with business partner due diligence
• Integration of LkSG processes into compliance management systems
• Preparation of required documentation
• Readiness and maturity analyses
• Benchmarking
• Preventive measures and response plans

Our expertise

At WTS we take a holistic approach towards ESG issues. Working in cooperation with the other business divisions of Advisory and Digital, we offer a comprehensive advisory portfolio in the field of ESG and related services.

Your contact is Dr. Gregor Sobotta, lawyer and tax law specialist and Partner of WTS Group AG in Düsseldorf.