Are you ready for the EU supply chain act?

Regulatory requirements: Are you ready for the EU supply chain act?

The proposal for an EU-wide supply chain law adopted by the European Commission in February 2022 sets a new benchmark and critical disruption for sustainability in the value chain of producing companies.
The German supply chain act will become effective in 2023, and the proposal for the remaining EU potentially in 2025. So the time to act is NOW!

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To whom does the EU supply chain act apply?

1. European companies with 500 or more employees and a worldwide net turnover of at least EUR 150 million (Group 1). For EU companies in certain resource-intensive or risky industries (e.g., textiles, mining), the law already applies to 250 employees and a net minimum turnover of 40 million euros (Group 2).
2. Companies from third countries operating in the EU that meet the requirements of Group 1 or Group 2. Even though SMEs are only indirectly affected by the law, they are obliged to be compliant, if they are part of the value chain of a company under this law.¹ In total, this affects over 12.000 companies in Europe.²

What exactly does this mean for companies that will be subject to the supply chain act?

In short, the law is intended to prevent environmentally harmful impacts from simply being "exported" to another country within or into the EU. Companies must now ensure transparency along the supply chain and assess or avoid risks to humans and the environment. They are also obliged to make this transparent to the public in order to make potential violations directly obvious to employees, customers, and stakeholders. This requires action beyond the usual risk analyses and greenwashing.

What are the differences from the German supply chain act?

Overall, European law is formulated more sharply than German one. The main differences are that more companies (>500 vs. >3000 employees) are affected and the European regulation considers the entire supply chain opposing the German law “only” considering direct suppliers. Furthermore, the penalties for non-compliance are also significantly higher.^{1, 3}

What are the penalties?

Violations can result in severe fines. The catalog of fines for the German Supply Chain Act states penalties ranging from € 100.000 - € 800.000. Even higher penalties are possible: Companies with annual sales of more than €400 million may face penalties of up to 2% of annual sales.⁴ The penalties in European law are likely to be similar, if not higher. In addition, violations under the EU directive can be prosecuted under civil law.

Now is the time for innovation!

Companies need to look for solutions to the challenging requirements posed by the Supply Chain Act. On the one hand, innovative technical solutions are needed for supply chain transparency and data governance. Above all, transparency means a large amount of data that needs to be collected and processed efficiently.

On the other hand, recent disruptions, such as the Supply & Energy Crises, also underline the importance of these regulations. The Supply Chain Act initiative, for example, shows that in search of a substitute for gas and oil, there is a risk of buying from suppliers from countries that have a questionable understanding of human rights and environmental protection.⁵ Thus, innovation in the field of materials, products, and technologies is not only essential for economic stability but also for the ability to comply with laws such as the Supply Chain Act. The focus must be on sustainability.

Conclusion

The Europe-wide uniform supply chain law is an important step in the right direction. Even if it will not come into force much earlier than 2025, companies should already be prepared for the considerably tougher requirements. In particular, innovations with regard to sustainability and digitization of the entire value chain should now be promoted.

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References

1. https://ec.europa.eu/commission/presscorner/detail/de/ip_22_1145‍
2. ‍https://www.zdf.de/nachrichten/politik/eu-lieferkettengesetz-menschenrechte-umweltschutz-100.html‍
3. https://www.bmz.de/de/entwicklungspolitik/lieferkettengesetz ‍
4. https://www.csr-in-deutschland.de/DE/Wirtschaft-Menschenrechte/Gesetz-ueber-die-unternehmerischen-Sorgfaltspflichten-in-Lieferketten/gesetz-ueber-die-unternehmerischen-sorgfaltspflichten-in-lieferketten.html‍
5. https://lieferkettengesetz.de/wp-content/uploads/2022/06/Initiative-Lieferkettengesetz_Briefing-Ukraine-Rohstoffe_final.pdf