Germany Supply Chain Due Diligence Act (LkSG) Effective ‘Internal’ Complaint Mechanism

The German Supply Chain due diligence legislation (Lieferkettengesetz – LkSG or German Supply Chain Act – GSCA), published in June 2021, introduces challenging new legal requirements that have not been previously faced by most companies. While LkSG legal requirements will initially apply only to the largest companies with a registered office in Germany[1], the European Union is currently preparing similar requirements[2] that will probably become effective throughout European Countries in the near future.

The most significant and challenging requirement that most, large as well as small, companies will be facing is the requirement to implement an internal complaint and remediation mechanism across their supply chains (Sections 7 & 8 of the LkSG Act). The LkSG Act provides companies with a number of options but requires that any complaint mechanism implemented should enable “persons to report human rights and environment-related risks …in its own business area or of a direct supplier”. The text also clarifies that such requirement is limited to risk resulting from the company’s own economic actions, even if this statement could probably be interpreted in multiple ways. It is also important to point out that a clarification posted on www.csr-in-deutschland.de[3] indicates that a “internal group-level procedures are all the more sufficient”.

However, the Act itself shows that an internal complaint procedure may not be enough to fully comply with this new legislation and that companies may need to consider more comprehensive grievance mechanisms. Sub-sections 8.2 and 8.4 indicate that the procedures established by the company should be publicly available. If the requirement would be limited to internal procedures, why requesting for these same procedures to be public? In sub-section 8.5, the text also states that annual review of the procedure shall consider new risk at the level of its own business area or at the level of direct suppliers.

Therefore, while the option to establish a limited internal complaint mechanism may at first seem easier to implement, due to a limited scope and as it will be managed directly by the company, such option may not be satisfactory to demonstrate full compliance with the act and the following potential challenges need to be kept in mind:

• For global supply chains, a company may be working with a large number of direct suppliers which are clearly indicated as interested parties and can be based in different countries. Complaints related to human rights and environmental risks at the level of these direct suppliers will need to be taken into account and to be addressed independently of any potential communication challenge.
• As a client, even for large organisations, persuading direct supplier to adequately prevent, address or remediate any human right or environmental violation will be complicated.
• Ensuring full impartiality and confidentiality when responding and addressing relevant human rights and environmental related complaints will be a challenge. Ensuring full compliance with GDPR requirements on data privacy during such process, will probably require a dedicated team.
• Finally, being able to build trust with interested parties so that the established grievance mechanism can be considered as credible, may become one of the most complex task and will require extensive training and awareness raising at the level of a group but also at the level of each direct supplier.

Following an in-depth review of the above challenges, the second option available to companies, as indicated in the German Due Diligence Act (such-section 8.1 last sentence), which is to adopt a grievance mechanism developed by an independent external third party, maybe considered by some companies as a most appropriate option. However, the main challenge that companies will be facing is that currently there is no such global grievance mechanism available in the market that is cost-effective and has demonstrated its efficiency on a large scale, across complex global supply chains.

An effective complaint mechanism that allows a company to ensure compliance against the LkSG Act, will need to address a number of critical issues, including the following:

• Raising awareness: Interested parties, including at the level of direct suppliers, will need to be informed that such grievance mechanism is being made available and raising awareness will be key in ensuring that relevant parties start trusting and are ready to adopt and use such grievance mechanism.
• Access to relevant interested parties: Any effective grievance mechanism will need to be accessible to the relevant population it is targeted at. It is clear that the LsKG is not focused on Germany based employees but has been designed to “prevent Human Rights violations in supply chains” as indicated in the title itself. This results in a number of issues that need to be addressed especially when considering the complexity of global supply chains, including providing secure access to potentially large number of workers located in different factories, in multiple countries, speaking different languages, while ensuring that the origin of the complaint can be traced back without compromising confidentiality.
• Fear of retaliation and Confidentiality: A basic requirement for any credible grievance mechanism is to ensure that confidentiality is maintained at all times, also allowing for a complaint to be raised anonymously. Confidentiality is also key to ensuring that workers will trust and use the system in place.
• Response and communication: Timely response to the grievances received will be essential in building trust. However, response alone will not be sufficient. The respondent will also need to be trained to be able to review and assess the complaint and decide whether any follow-up is required. In some extreme cases, complaints received may need to be communicated to the relevant local authorities for resolution or in case of violation of human rights or of environment related obligations (Section 9 of the LkSG Act).
• Remediation: This is the most challenging part of the process but is of course essential to ensure that the system is effective over-time. Adequate resolution will generally require back and forth communication with the complainant and the supplier’s top management to understand the context and can be a lengthy and time-consuming process.
• Records: Maintaining records will be essential to be able to demonstrate compliance with the LsKG requirements if needed. However, confidentiality will also need to be maintained as well as compliance with any relevant data privacy requirement.

The e-Voices online platform (www.e-voices.com) provides companies with a ready to use grievance mechanism that is currently being implemented across complex global supply chains. The platform has been successfully deployed in the tuna fishery industry to allow crew members on high-seas fishing vessels to have access to an effective complaint mechanism available in multiple languages. Complaints can be received directly by the supplier, by the company itself or better by an independent third-party to ensure that complaints are adequately and timely addressed in a confidential and anonymous manner, and to avoid any potential retaliation. Furthermore, e-Voices allows companies to keep track of the complaints received, to maintain records of communication with the complainant(s) as required. It is also possible, through some short online videos, to provide local workers with relevant information and training in their own language. The e-Voices platform is a ready to use tool that effectively complements any risk management program and is aligned with the spirit and requirements of the LkSG Act.

Please do not hesitate to contact us for any additional information or for any question you may have regarding the e-Voices solution and how it could help your organisation in complying with the new German Due Diligence requirements.

e-mails: support@e-Acore.com

phone numbers: +1 (202) 413 1128 or +33 (0)6 04 51 48 75

[1] Companies (German legal entity) with more than 3,000 employees will have to comply from 01 January 2023 and companies (German legal entity) with more than 1,000 employees will have to comply from 01 January 2024.

[2] https://ec.europa.eu/commission/presscorner/detail/en/ip_22_1145

[3] Indicated on the Website as an initiative of the Federal Ministry of labour and Social Affairs and CSR Europe which is the European Business Network for Corporate Sustainability and Responsibility.