Introduction
Violations to environmental rights
Environmental due diligence obligations
Best practices in environmental management
Environmental violations: Enforcement and consequences
The Supply Chain Act was passed by the German Parliament in 2021. It will enter into effect on January 1, 2023. It addresses the negative effects of global supply chains on human rights and the environment. The Supply Chain Act’s overall objective is to prevent or reduce environmental risks and violations of human rights.
The Supply Chain Act is applicable to all companies that have their headquarters, administrative seat or statutory office in Germany. Also, any company that has a branch office or branch office in Germany is included. In addition, certain headcount thresholds have to be met – namely, from 1 January 2023, companies with at least 3,000 employees and, from 1 January 2024, companies with at least 1,000 employees are subject to the Supply Chain Act. Group companies are included in the calculation of employees.
This article discusses the Supply Chain Act’s environmental provisions, which companies must comply with.
Violations to environmental rights
The Supply Chain Act generally requires companies to make every effort to ensure that there is no violation of environmental rights in their business operations or in the supply chain. Obligations under the Supply Chain Act are mere “best effort obligations” – that is, they do not require companies to actually achieve prevention of environmental protection violations, but to do their best to prevent such violations.
If one of the following prohibitions is broken, it’s a violation of an environment-related duty.
- The prohibition of the production and use of mercury-added products;
- The prohibition of the production or use certain chemicals (including persistent organic pollutant (POP);
- The prohibition on the import and export of poisonous waste.
There is no general clause governing the protection of legal rights under environmental treaties.
These prohibitions are based on international agreements, such as the Stockholm Convention on Persistent Organ Pollutants (Stockholm Convention on Persistent Organic Pesticides) and the Basel Convention on the Control of Transboundary Movements of Hazardous Materials and Their Disposal.
Environmental due diligence obligations
The Supply Chain Act imposes a variety of due diligence obligations on companies. This includes the implementation and monitoring of risk management systems, prevention/remedial measures, and risk management. It also requires compliance with reporting obligations and documentation.
The Supply Chain Act implements a “tiered” system of due diligence obligations. These obligations are applicable to the company’s business operations as well as to its direct suppliers (known collectively as “tier 1 suppliers”) without restriction. Indirect suppliers, also known as “tier 2 providers”, are exempted from the due diligence obligations.
Risk analysis and risk management
Companies must implement proper risk management and risk analysis procedures in their business operations. As part of their corporate due diligence, companies must conduct a thorough risk analysis to determine what measures they need to take to comply the Supply Chain Act’s prohibitions. This risk analysis must be done on an annual basis, as well as when necessary (i.e. in relation to new or increasing risks).
A “risk” is a situation in the which there is a reasonable likelihood that protected environmental rights (including prohibitions of the production or use of mercury-added product, prohibitions of the use of certain chemicals, and the prohibition on the export and import poisonous waste) could be violated due to factual circumstances.
The legislature proposes a two-step process in this regard. First, it is common to group risk factors within the business operations categories of a company (eg, business area, locations, (countries where origins of) products, or political framework conditions). Second, it is important to evaluate and prioritize risks based upon the nature and extent of the expected risk.
Preventive/remedial measures
Once risks are identified, companies must take the necessary preventive or remedial measures to stop the violation. Companies can be forced to end business relationships with direct suppliers if they violate the Supply Chain Act. To prevent such violations, you can implement codes of conduct, select reliable suppliers, ongoing supplier monitoring, or training courses.
Documentation and reporting requirements
Companies are subject to both an internal documentation and external reporting obligation. These due diligence obligations are necessary to allow the competent authority to verify compliance with the Supply Chain Act.
Companies must publish an annually updated report on company websites that details current environment-related risk and whether supply chain obligations were violated. The report must include information about the company’s preventive and corrective measures taken, as well as an evaluation of their effectiveness. However, companies are not required to reveal trade secrets and business information.
The Federal Office of Economics and Export Control will receive the report.
Procedure for Complaints
Companies are required to have a complaint procedure, including the relevant rules of procedure, in place. Or they can use external complaints systems to grant access to such a procedure in a clear and non-barrier manner. Access must be granted to employees (e.g. whistle-blowers), as well as employees of suppliers (or indirect sources) and other people who could be affected by environmental hazards. The Supply Chain Act also provides that whistleblowers have confidentiality and should not be subject to reprisals.
Implications regarding indirect suppliers
As we have already mentioned, the Supply Chain Act imposes a “tiered” system. Indirect suppliers are subject to less stringent due diligence obligations than direct suppliers. In particular, the company only has to perform a risk analysis and take preventive or remedial steps if there is any evidence that an environmental obligation has not been met. The best part is that companies don’t have to identify risks early. The specific preventive or remedial measures that companies must take with indirect suppliers are less stringent than those for direct suppliers. For example, the termination of business relationships with indirect suppliers is not mandatory.
Best practices in environmental management
It is too early to speak about best practices because the Supply Chain Act has yet to come into force. After the Supply Chain Act is in force, best practices could evolve. To make the often vague provisions of Supply Chain Act more concrete, the authorities will introduce administrative rules and guidelines. However, these administrative rules or guidelines are not yet published. Additionally, the Supply Chain Act expressly requires the Federal Office of Economics and Export Control (FOEC) to assist companies in meeting their due diligence obligations and providing such support.
However, companies are encouraged to prepare the following measures. Environmental risks are not always treated differently from other risks. The risk analysis will be complex and will require the assistance of environmental specialists. Audits at the sites of indirect suppliers are also subject to the same rules. The assessment of technical details will often require the assistance of environmental experts.
Environmental violations: Enforcement and consequences
The Supply Chain Act clearly states that it doesn’t intend to establish new civil law claims other than general civil law principles. The legislature stresses that the Supply Chain Act will only be enforced by administrative and administrative offences law. The Supply Chain Act, therefore, provides extensive administrative enforcement mechanisms for the authorities and imposes strict penalties.
Civil enforcement
The Supply Chain Act stipulates that civil liability for a breach of obligations under the Act is not applicable to breaches. However, civil liability that is established independent of the Act is unaffected.
Customers could first file civil law actions claiming a material flaw, challenging sales contracts due fraud misrepresentation or asserting precontractual liability claims. Secondly, claims in relation to suppliers are conceivable – for example, recourse claims for reputational damage on a contractual basis or contractual termination rights in the event of violations. Competitors could sue for injunctive relief or removal, as well as damages due to inaccurate reporting. Finally, third party claims are possible, particularly if the duty of care has been violated.
When violations of environmental rights result in harm to employees, or other affected persons, civil enforcement may be necessary.
- Mercury-added products, and mercury in manufacturing processes can cause accidents or long-term effects on the health of people.
- The import or exportation of poisonous materials can have long-term effects on your health.
German courts can be sued for violations of the Supply Chain Act. The question of which law is applicable arises because the facts of this case often cross national borders. The applicable conflict of laws rule for tort claims is, in principle and article 4 of the Rome II Regulation.(1)This means that the law applicable to the damage is the general law.
Administrative enforcement
Authorities can order improvement measures if there are any incidents of non-compliance to the Supply Chain Act. They may issue orders to prevent or remediate breaches of due diligence, enter company premises, or disclose certain documents to gather information.
The Supply Chain Act’s enforcement mechanism combines both administrative control and private selfcontrol.
Penalty regime
Companies that fail to comply with the due diligence requirements can be subject to fines by the Federal Office of Economics and Export Control. Negligence is enough to constitute an infraction. Companies may face administrative fines of up to €8 million or up to 2% of the company’s worldwide annual turnover. Non-compliance can also lead to exclusion from public procurement for up to three years.(2)The German competition register will also be included for the affected company. The affected company cannot enter into agreements with public sector partners. This can lead to severe sales and profit losses, depending on the customer structure.
Contact us for further information. Marc Ruttloff Or Eric WagnerGleiss Lutz telephone (+49 711 8997 0) Or email ([email protected] or [email protected]). You can access the Clifford Chance website at www.cliffordchance.com.
Endnotes
