The fashion industry, along with its supply chains, are facing increased political scrutiny, being labelled as one of the world's top polluters. The Rana Plaza tragedy has further intensified criticism by NGOs and politicians about working conditions in these supply chains. To address these concerns, there's been a push by policymakers to establish a legal duty of care that extends beyond the company's own doorstep. While the EU is still negotiating its Corporate Sustainability Due Diligence Directive (CSDDD or "CS3D"), Germany's fashion sector and its suppliers are already adapting to the regulations set by the German Supply Chain Act (Lieferkettensorgfaltspflichtengesetz or "LkSG"). The LkSG took effect on 1 January 2023, with its reach extending from 1 January 2024.

What’s in the law?

The LkSG variously establishes requirements and prohibitions on corporate action to prevent human rights violations in the form of child labour, slavery and forced labour, failure to comply with occupational health and safety obligations, decent wages, the right to form trade unions or employee representative bodies, access to food and water, and unlawful dispossession of land and livelihoods. Unlike the EU's Green Deal and the proposed CS3D, the LkSG does not focus on comprehensive environmental protection and does not touch on climate change obligations. It does, however, extend due diligence obligations in relation to certain environmental risks necessary to protect human health. Key elements of the due diligence obligations include the establishment of a risk management system, a range of preventive measures and, where necessary, remedial measures to identify, prevent or minimise the risks of human rights abuses and environmental damage to human health, the establishment and maintenance of a complaints procedure as well as adequate record keeping and the submission to the BAFA and publication of an annual report. 

Who is affected?

Although the supply chain covered by the Act generally includes all of a company's indirect suppliers, the key due diligence obligations only apply to the company's own business and its direct suppliers. An in-scope company will only need to act with respect to indirect suppliers if it has 'substantiated knowledge' of a possible human rights or environmental violation. It is important to note, however, that companies aren't obliged to prevent all human rights abuses or environmental damages; they're only required to exert their 'best efforts' to mitigate them.

The LkSG only imposes obligations on companies that have their central administration, principal place of business, administrative headquarters, statutory seat or branch and at least 3,000 employees in Germany. From 2024, the LkSG will also apply to German based companies with at least 1,000 employees in Germany. This means that more fashion retailers who are not based in Germany but have stores there will soon be covered by the LkSG. 

That said, as companies within the Act's scope delegate their responsibilities down the supply chain, smaller and foreign firms are also becoming more affected. As a result, such companies are faced with an increasing number of updated codes of conduct, questionnaires, audit and self-assessment requirements.

What are the challenges?

In many cases, requests from business partners can exceed the actual stipulations of the LkSG. This places suppliers in a challenging position, as they attempt to balance fostering good business relationships and pushing back against extensive requests. Still, companies not directly bound by the LkSG would be wise to set up processes and take measures in anticipation of its broader implications.

In-scope companies find themselves in a similarly difficult position. Due to the initial absence of clear guidance from the Federal Office of Economics and Export Control (BAFA), they must navigate between making their best efforts to avoid human rights abuses and environmental harm while not overburdening their business partners. BAFA's latest guidance paper further emphasised the responsibility of in-scope companies by calling for tailor-made preventive measures and cost-sharing with suppliers instead of one-size-fits-all approach.

What to do now?

In-scope companies should act quickly to ensure compliance if they have not already done so. Most will not be starting from scratch. Instead, they should assess how the new requirements align with their current compliance systems and policies and how these can be updated to meet the new documentation and reporting obligations.

Companies indirectly impacted by the LkSG should discern what is reasonably expected under the Act for those who provide goods and services to German companies. They ought to review and, if needed, modify their existing supply chain documents and policies, and formulate a strategy to address customer enquiries.

In both cases, there are no one-size-fits-all solutions or silver bullets. Companies must strive to prepare their staff and systems for upcoming challenges, protect the people along and bring transparency to their supply chains.