New regulations on human rights and environmental due diligence duties in the context of global value chains
Our Compliance Update provides insight on the current debate about due diligence duties of companies under the proposed law on sustainable value chains.
The Federal Ministry for Economic Cooperation and Development (Bundesministerium für wirtschaftliche Zusammenarbeit und Entwicklung - BMZ) is currently preparing a draft law on sustainable value chains (nachhaltiges Wertschöpfungskettengesetz - NaWKG).
The draft text dated February 1, 2019 has already been the subject of press coverage in various newspapers. With the draft law, the BMZ apparently tries to extend the responsibilities of German companies to their value chains - also outside Germany.
With its approach the BMZ follows similar laws already in force in France (“Loi de Vigilance”) and Great Britain (“Modern Slavery Act”).
In drafting the law, the BMZ takes a contrary stand to the coalition agreement which provides that the National Action Plan for Business and Human Rights (Nationaler Aktionsplan Wirtschaft und Menschenrechte - NAP) is to be implemented before further legal steps for the protection of human rights are taken.
The degree of implementation of the NAP is to be the subject of a comprehensive survey in 2020. This will include, amongst other things, a representative check of the human rights due diligence duties of companies which will be carried out in May 2019. The check was announced in a letter sent by the Interministerial Committee to more than 5,000 companies in November 2018. Interestingly, apart from the Ministries for Foreign, Financial, Social, Economic and Energy Affairs, the letter was also signed by the BMZ.
Purpose of the law
The purpose of the law is to ensure the protection of internationally recognised human rights and the environment in the context of global value chains. This is to be achieved both in the public interest and in the interests of those who - directly or indirectly - are adversely affected by global value chains.
The law is to apply to so-called major companies within the meaning of section 267 para. 3 of the German Commercial Code (HGB) which meet at least two of the following criteria:
- A minimum of 250 employees
- A balance sheet total of at least EUR20m
- A minimum turnover of EUR40m
Moreover, the companies must have their seat, central administration or principal place of business in Germany and must directly or indirectly engage in business in high-risk sectors, such as agriculture, mining, textile or electronics, or in conflict-affected and high-risk areas.
Which processes are companies required to change?
Companies have to comply with comprehensive due diligence duties to protect internationally recognised human rights and to fulfil basic environmental requirements and avoid environmental damage. This includes, in particular
- The conduct of an annual country- and sector-specific risk assessment which, ideally, would involve the persons affected
- The obligation to take adequate preventative measures and, if applicable, promptly take adequate remedial action
- The obligation to appoint a compliance officer who is obliged to establish a complaints mechanism and whistle-blower system and draw up comprehensive documentation of its due diligence duties.
Non-compliance with due diligence duties may subject a company to fines totaling up to EUR5m.
Role of compliance officer
As in other laws, such as the German Banking Act (Kreditwesengesetz) or the German Money Laundering Act ( Geldwäschegesetz), the rights and duties of compliance officers are comprehensively regulated. Compliance officers enjoy extensive dismissal protection. However, a culpable breach of duty may subject a compliance officer to sanctions in the form of fines or imprisonment. Such breach of duty may include, for example, committing a culpable violation of documentation duties or causing serious health damage or even the death of a person.
What rights do persons affected have against companies?
Moreover, the purpose of the draft law is to help those who directly or indirectly have suffered damage in the context of global value chains to enforce their claims before German courts.
For example, global companies are to be obliged to waive the statute of limitations pending completion of a complaint procedure provided for in the draft law.
Also, due diligence duties regarding non-contractual liability claims of injured parties against German companies are subjected to the requirements of the law on value chains and, thus, German law irrespective of the local law applicable under International Private Law.
What next steps is the Federal Government expected to take?
The representative check in May 2019 will definitely take place. This will include an evaluation of the implementation of the voluntary commitment under the NAP adopted in December 2016.
It is currently not possible to predict to what extent the law on sustainable value chains will be implemented.
Should companies prepare for increasing due diligence duties in global value chains?
Regardless of the implementation of the law on sustainable value chains, companies are strongly recommended already at this stage to prepare for stricter regulation in the context of value chains as the regulation follows a global trend which sooner or later will also apply in Germany. After the United Kingdom and France passed such laws at the end of last year, Australia enacted a similar law which is comparable to the UK Modern Slavery Act. Also, starting in 2021 at the latest, companies will be subject to stricter obligations under the EU Conflict Minerals Regulation.
We would be happy to assist you in all compliance and legal issues arising along your specific value chains.