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Germany Fires Warning Shot on Supply-Chain Abuses

Germany’s government agreed Wednesday to implement new legislation that could fine companies millions of euros for labor or environmental abuses that occur at any point in their supply chain, from the harvesting of raw materials to the completion of the finished product.

Under the so-called “Lieferkettengesetz,” or supply-chain law, businesses can be fined up to 2 percent of annual revenues of 400 million euros ($478.4 million) or more if their contractors abroad are found to be in breach of human rights or environmental rules. Penalties aside, such companies could also be blocked from public procurement processes.

“This law protects workers from exploitation across sprawling supply chains and protects human rights across the world,” Olaf Scholz, federal minister of finance, said in a statement. “In [the] future, it will be clear that ‘made in Germany’ also means respect for human rights.”

The legislation will roll out in stages, beginning with Germany’s largest companies with more than 3,000 employees in 2023 and then extending to firms with 1,000-plus employees from 2024. Subcontractors outside of Germany will be beholden to the same standards, although indirect suppliers will only be interrogated if issues are flagged.

Still, the draft law has its detractors. In a statement published on Friday, the Business & Human Rights Resource Center described limiting the scope of companies’ due diligence obligations to their own operations and those of direct suppliers as a “massive weakness” made as a concession to business associations, the federal minister of economic affairs and energy, the federal chancellor and others.

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“From the perspective of the civil society actors who have joined forces to form the Initiative Lieferkettengesetz (Supply Chain Act Initiative), such a restriction is completely unacceptable,” the think tank said. “After all, most human-rights violations take place at the beginning of supply chains—and thus risk not being covered by the law.”

Chancellor Angela Merkel’s cabinet had initially considered allowing companies to prevent harmful practices or exploitation on a voluntary basis. A survey published by the foreign ministry last year found, however, that only 22 percent of German companies with more than 500 employees have a system in place to monitor the production of their foreign-made goods.

“The problem is that industrialized nations externalize, meaning we outsource production to developing countries and thereby undermine the production standards we apply in our wealthy societies,” said Gerd Müller, minister of economic cooperation and development.

“We accept and cement the exploitation of other human beings and nature in developing countries.”

Germany’s move is part of a burgeoning trend among governments to legally require companies to monitor, identify, prevent and remedy risks to human rights and the environment in their operations and business relationships. In 2017, France became the first country to introduce a “duty of vigilance” law holding large corporations responsible for identifying and mitigating labor and environmental risks that could occur as a result of their business activities and those of their suppliers and subcontractors. The same year, the lower house of the Dutch Parliament adopted a “duty of care” law meant to prevent child labor.

Self-policing, experts say, has only gone so far. While companies are required to conduct mandatory human-rights diligence under the United Nations Guiding Principles on Business and Human Rights, nearly half (46.2 percent) of the world’s 229 top companies evaluated by the Corporate Human Rights Benchmark in 2020 “did not demonstrate the willingness and commitment to take human rights seriously.” When it came to companies that had fielded at least one allegation of a serious human-rights issue, fewer than one-third of cases led to a dialogue with stakeholders and just 4 percent resulted in an effective, satisfactory remedy for the victim.

More governance is coming down the pipeline: The European Commission recently closed a “public consultation” on potential legislation for environmental and human-rights due diligence that would increase European Union oversight of companies over their operations both within and outside the 27-country bloc. (Post-Brexit Britain. which recently said it would fine companies that fail to publish annual “modern slavery” statements, would be exempt.)

The European Parliament is expected to pass a resolution as early as next week with non-binding recommendations on what it thinks the European Commission’s diligence proposal should include, such as whether the victims of human-rights abuses would have the right to sue EU companies for damages. A formal proposal is anticipated to arrive before the end of the first quarter of 2021.

All of this would require a level of supply-chain visibility that fashion businesses, with their sprawling global networks of suppliers and subcontractors, have long struggled with, particularly beyond the first tier of finished-goods manufacturers. An October study by grassroots group Fashion Revolution found, for instance, that just one brand out of the 62 it evaluated—Nudie Jeans—discloses a list of all its production sites in the textile hub of Tamil Nadu in India.

“When you start to look further down the supply chain where fabrics are knitted or woven, textiles are treated and laundered, yarns are spun and dyed, fibers are sorted and processed and raw materials are grown and picked—what the industry commonly refers to as Tiers 2, 3, 4 and 5—there remains a widespread lack of transparency,” the report’s authors wrote. “In fact, there seems to be a broad absence of investigation and supply-chain mapping beyond the first tier.”