Achieve Global Impact through LkSG Compliance and BAFA Reporting in Supply Chain Operations
The implementation of the German Supply Chain Due Diligence Act on January 1, 2023, represents a notable advancement in fostering responsible corporate governance across global supply chains. This legislation acknowledges the pivotal role of companies in advocating for a sustainable economy and society. The LkSG establishes explicit guidelines for companies falling under its purview to meticulously identify, minimize, or eliminate potential adverse effects of their business operations on human rights and the environment.
In 2016, the German Federal Government embraced the National Action Plan for Business and Human Rights (NAP), striving for a more socially just globalized economy through collaboration with businesses. Aligned with the United Nations Guiding Principles on Business and Human Rights, the NAP emphasizes the state’s duty to protect, the availability of judicial and non-judicial remedies, and corporate responsibility. Actively supporting businesses in meeting these responsibilities, the German Federal Government’s dialogue with the corporate sector laid the groundwork for the Supply Chain Act, reflecting a dedicated push for responsible business practices across global supply chains.
Affected companies under the LkSG are mandated to draft and disclose annual reports, detailing the execution of their due diligence responsibilities. These reports encompass aspects such as identifying human rights and environmental risks, outlining measures taken to fulfill obligations, evaluating the impact and effectiveness of these measures, and drawing conclusions for future actions. The reporting duty is pivotal, necessitating transparent and clear documentation of companies’ due diligence efforts concerning human rights and environmental impacts.
The German Supply Chain Act impacts companies based in Germany with more than 3000 employees, and starting from 2024, it extends its scope to include companies in Germany with more than 1000 employees.
The Federal Office of Economic Affairs and Export Control, commonly known as BAFA, operates as a key federal authority under the oversight of the Federal Ministry of Economics and Climate Protection (BMWK) in Germany. It is instrumental in handling essential administrative tasks related to foreign trade, economic promotion, and energy.
One of the primary functions of BAFA is to assess reports provided by companies to ensure compliance with legal regulations. This evaluation focuses on comprehensive documentation concerning the identification and mitigation of environmental and human rights risks. Additionally, BAFA holds the authority to impose penalties on companies that fall short of fulfilling their obligations under the LkSG. In this manner, BAFA significantly contributes to the enforcement and implementation of this sweeping legislation.
Affected companies, as per the Supply Chain Act (LkSG), must annually report their due diligence fulfillment for the previous business year. Reports should be submitted to BAFA within four months after the business year ends and be publicly accessible on the company website for seven years. Internal documentation of due diligence obligations must be ongoing but not publicly accessible for the same duration.
From January 1, 2023, companies in Germany with over 3000 employees must report. From January 1, 2024, those with over 1000 employees are also obligated, including branches with over 3000 employees and, from 2024, 1000 employees. Even if not directly falling under LkSG, companies may be indirectly affected, necessitating cooperation to comply with human rights and environmental standards.
Beginning June 1, 2024, BAFA will review reports without imposing sanctions for submissions made by May 31, 2024. No special reporting rules apply after June 1, 2024. Other due diligence obligations and monitoring remain unaffected by this deadline regulation.
Reports under LkSG use a structured questionnaire with various question types. Complete and truthful answering is crucial for compliance with reporting obligations (§10 section 2 LkSG). The report is submitted electronically to BAFA, requiring prior registration.
When completing the questionnaire, a company should articulate key points:
Outline actions taken in line with legal obligations and policy statements, addressing complaints.
Evaluate the impact and effectiveness of actions, drawing conclusions for future strategies. If the report convincingly states no identified risks or violations, no further explanations are needed. Consideration for trade and business secrets is vital, given the sensitive nature of the documentation, even though it is not publicly disclosed.
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