The German Supply Chain Due Diligence Act (the Act) legally requires large German companies to address harms to workers, communities, and the environment related to their own operations and supply chains. It has only been in force for just over a year, but there are already clear indications of first positive impacts.

The Act builds on the international UN and OECD standards on business and human rights, which apply risk-based due diligence to the full value chain. But in a departure from those standards, the Act requires “substantiated knowledge”, or actual indications of possible abuse, as a trigger for risk analysis, prevention and mitigation measures beyond tier 1 of the supply chain.

In seeking to unpick how “substantiated knowledge” can be most effectively applied to ensure the spirit of the law is upheld, we analysed our own database of allegations of abuse against companies headquartered in Germany. We found there is valuable information available on potential instances of abuse related to lower tiers, which can feed into regular analysis and prioritisation of risks along the full supply chain under the Act – so long as “substantiated knowledge” is not applied artificially narrowly.

Allegations on our website

During the period examined (1 January 2020-31 December 2021 – before the Act came into effect in 2023, to provide a useful baseline) we recorded 285 allegations against 129 German companies (some faced multiple allegations), largely drawn from media and NGO reports. In 102 cases we invited the company to respond.

While abuses especially in the deeper supply chain, or their connection to specific lead firms, often go unreported, and these instances are only the tip of the iceberg, our data nevertheless indicates the probability of human rights risks is often higher beyond the first supply chain tier: only approx. a third of allegations (32%) related to companies' own operations and their direct, or tier 1, suppliers (15% and 17% respectively). Twenty-nine (10%) explicitly referred to incidences at indirect suppliers of German brands, despite the opaqueness of supply networks; in 61 cases (21%) the supply chain stage was not specified, i.e. impacts could relate to direct and/or indirect suppliers, and 104 (37%) happened "downstream", after a product or service had left the company. If companies misinterpret the Act as a narrow task of mainly collecting and checking compliance statements from (all) tier 1 suppliers, this could lead to resources being drawn away from more effective, hands-on measures and from where other, potentially more serious human rights risks lie. This is where “substantiated knowledge” plays a fundamental role.

Substantiated knowledge

"Actual indications”, according to governmental guidance, can include media and NGO reports, as well as other information considered common knowledge, or which a company receives directly, including through complaints mechanisms. It should be possible for a company to locate the risks in its own supply chain “with reasonable efforts”, but the information does not need to indicate that abuse has occurred at a (specific) supplier.

Analysing our sample, we found that in 43% of the allegations related to tier n and unknown (tier 1 or n) layers, the reports specified individual suppliers by name – a high percentage considering reports that focus on tracing supply chains require a great deal of research and effort from NGOs. For example, a study by the Rosa Luxemburg Foundation identified labour rights abuses on five orange farms in South Africa, which produce for packing houses that in turn supply German supermarkets.

Reports that do not specify (sub)suppliers still offer concrete indications as to where human rights abuses may be occurring: over half the cases (48, 53%) contained information regarding both the country or region and the specific right(s) concerned. Only three allegations (3%) against German companies were limited to information on the overall poor human rights record of a sourcing region or country, and just one case related to sectoral risks in aluminum supply chains without specifying a region or country.

In all cases, we believe companies can be expected to have "substantiated knowledge" of possible abuse. They should process different types of information, including reports on industry peers, or accounts of sectoral/regional risks that do not mention specific lead firms (a potential source of tier n information not reflected in our sample of company allegations), and drill deeper and define responses as appropriate. This needs to happen without unduly shifting responsibility onto suppliers, which would be a misapplication of the Act. In contrast, adjustments to a brand’s own purchasing practices, as mentioned in the law, can help address time and cost pressures on suppliers and related repercussions for workers that may reach several tiers down.

Which sectors were implicated?

While human rights impacts can occur across virtually all sectors (our analysis identified 38), certain sectors were associated with a higher risk, with just 10 sectors accounting for 85% of all allegations (underreporting of certain sectors may apply). The top two sectors were the textile (26%) and food sectors (17%). The finance and insurance sector was the fifth most implicated sector (8%) and accounted for over a fifth of downstream allegations – which reinforces concerns over the exclusion of key financial sector impacts in guidance issued by the enforcement authority, as well as in the EU Corporate Sustainability Due Diligence Directive (CSDDD).

Outlook

Information from a variety of media, NGO, agency and grassroots reports, such as those we collect on our website, provides "actual indications" and can be one initial starting point for mapping and assessing human rights and environmental risks across the supply chain, along with other insights, feedback and consultations. Deeper assessment, informed and driven by relationship-building on the ground and engagement with affected stakeholders, can then feed into tangible and proportionate prevention, mitigation and remediation measures.

It therefore stands to reason the concept of “substantiated knowledge” can and should continue to be interpreted broadly. In practice, companies are well advised to identify, prioritise (based on severity, if prioritisation is necessary) and tackle human rights and environmental risks along the full supply chain in an integrated and proactive manner, as also recommended by the enforcement authority, to maximise efficiency, prevention and positive impact under the German Act. The EU's CSDDD, which applies the risk-based approach across direct and indirect supplier levels much more clearly and coherently, and which includes more comprehensive protections and opportunities for SMEs, will then be key to further and substantively enhance alignment with the international UN and OECD standards, and promote an EU-wide level playing field and convergence among different existing national due diligence rules in Europe. This will massively benefit both companies and, most importantly, rightsholders.

By Johannes Blankenbach and Saskia Wilks, BHRRC