The German Parliament passed the law on coporate due diligence in supply chains (Lieferkettensorgfaltspflichtengesetz) (“GSCA”) on June 11, 2021. GSCA is slated to come into force on January 1, 2023 and will be implemented in a phased manner.
Introduction of GSCA is an affirmative legislative step by the German Parliament to identify and assess environmental, social and governance (“ESG”) issues, including potential human rights violation within their supply chains (direct and indirect and across jurisdictions), and establish effective risk management systems. The basis of the Action Plan and the new national requirements is the due diligence standard of the 2011 UN Guiding Principles on Business and Human Rights.
Applicability- “In-scope” companies under GSCA
From January 1, 2023, in Phase 1 of GSCA implementation, the applicability will extend to all companies regardless of their legal form, including international legal entities with more than 3000 employees. It is pertinent to note that the number includes employees based out of Germany, seconded employees and subject to conditions temporary agency workers.
In phase 2 of the implementation of GSCA, which is expected to commence January 1, 2024 GSCA would also cover companies with more than 1000 employees.
In-scope company’s duty of care and obligation
Companies are required to exercise due diligence in their supply chains to maintain a safe ESG environment within the such in-scope company and across their global supply chain.
Supply chain of an in-scope company is expected to cover all products and services involved in all stages and also jurisdictionally will extend to supply chains within and outside Germany. Suppliers would include both direct and indirect supplier
Due diligence is an obligation of the in-house company to “make an effort”, not an obligation to succeed. The obligations of duty and care of an in-house company would include:
1. ensuring that the suppliers act in compliance with the parameters set out by GSCA.
2. respecting human rights and environmental obligation throughout the supply chain.
3. establishing risk management system and regular risk analyses.
4. adopting standard policy statement and preventive measures within the own business vis-a vis suppliers.
5. establishing complaints procedure and regular reporting requirement.
The obligation to make an effort Violation of GSCA in any form could give rise to penalties as high as EUR 8,000,000 and companies with a yearly global turnover of more than EUR 400 million can be sanctioned with fines of up to 2% of their turnover. These penalties are significant and are comparable to penalties under GDPR and anti-trust laws.
Further, any violation of GSCA obligations can give rise to exclusion from public tender procedures.
India Chapter – is GSCA applicable or is it remote in an Indian context
Within EU Germany is an important trade partner for India. GSCA applicability in an India context is at two levels- direct applicability and indirect applicability.
GSCA would be directly applicable to companies set up as a JV or WoS in Germany subject to the qualifying thresholds.
Indian suppliers (direct and indirect) would be expected to follow the risk management protocols and support the German company to follow through in its duty of care
Identified risks for direct and indirect suppliers to German companies:
1. Termination of contract leading to direct business loss.
2. Reputational risk and loss of Germany based business opportunities.
3. Increased contractual risks including higher indemnity exposure.
4. Requirement of enhanced director & officers insurance and other insurance policy cover.
5. Cost impact at multiple levels- compliance, ongoing standard operating procedures, risk management tools.
6. Exclusion from low cost financing.
7. Loss of competitiveness vis a vis suppliers from other countries.
Expectation from Indian government:
1. Introduction of a self-certification mechanism for validating compliance by Indian suppliers within the ambit of due diligence which gives comfort to both the countries.
2. Mandatory gap analyses in supply chain.
3. Mapping of Indian law to the requirements of GSCA.
4. Infrastructure support to MSME sector in India to meet the GSCA requirement
Given the constant change in the geopolitical framework companies must as a matter of sustained growth and stability adopt ESG based models of operation.