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A foot in the door: Will the German draft law open doors for EU-wide corporate accountability?

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After months of tough negotiations, the German government announced it has agreed on a draft supply chain law last Friday. According to our member Germanwatch, representing the German CorA network of circa 70 German NGOs, the agreement is “an important first step” in strengthening human rights in the value chains of German companies.

The government plans to introduce a new duty of care for human rights for the country’s 600 largest companies when the law takes effect in 2023. The scope would be further expanded to cover around 2,900 companies with more than 1,000 employees from 2024 onwards.

It hopes to oblige German companies to regularly identify, mitigate and prevent risks associated with their own activities and those of their subsidiaries, suppliers and subcontractors, with whom they have an established contractual relationship. If a company shirks its obligations, significant fines and sanctions would be levied against it of up to 10% of annual turnover, as well as exclusion from public contracts for up to three years.

If approved by parliament, Germany will become only the second EU country with a comprehensive, cross-sectoral corporate human rights and environmental due diligence law, following France’s pioneering 2017 duty of vigilance law, which covers only large companies with more than 5,000 employees.

In other EU member states, companies are not yet legally obliged to check whether they are complicit in human rights abuses or environmental damage, except for a few issue or sector-specific exceptions.

More recently, however, governments and parliaments in Netherlands, Finland, Luxembourg, Denmark, and Austria have also started to consider their own supply chain laws. So, which EU member state will strike next while the iron is hot?

Long overdue

Johanna Kusch from Germanwatch, coordinator of the civil society alliance Initative Lieferkettengesetz, called it “an important and long overdue step in the right direction”.

Over the past few years, German civil society has paved the way for greater corporate accountability, and now the supply chain initiative is widely popular among Germans too, with 75% supporting such a law, according to a poll commissioned by Germanwatch. 

The CDU/CSU and the SPD coalition had agreed to introduce a supply chain law if the business community did not sufficiently comply with its voluntary commitment to guarantee human rights. According to a government survey, less than one in five German companies monitored their foreign subsidiaries and contractors for human rights violations.

But it’s not all sunshine and rainbows

Fierce lobbying by German business associations and corporate lobbyists has certainly played its part in the weakening of the proposal.

The agreement falls short of providing victims of human rights violations improved legal protection before German courts, despite all three ministers for development cooperation, for labour and social affairs, and for the economy acknowledging that the purpose of the law should be to enhance judicial remedy for overseas victims.

To be effective, the future German law must include a civil liability provision to strengthen compensation claims by affected workers and other foreign victims. Two of the three ministers fought hard for stronger civil liability rules, but ultimately ran out of steam due to concerted pressure from corporate lobby groups.

To better align the proposal to the UN Guiding Principles, the Bundestag will also need to clarify that companies must proactively identify risks throughout their entire value chain, instead of letting companies off the hook until they are prompted by complaints.

The agreement has also been criticised for neglecting environmental risks and harms.

If they are serious about delivering real change, German lawmakers will have to take into account that the worst cases of human rights violations and environmental damage, such as child labour or toxic waste dumps, are typically found at the bottom of corporate value chains.

They will also have to extend obligations to small and medium-sized enterprises, especially those in high-risk sectors, such as agriculture, mining, garment and construction industries.

Brussels, you’re next

Even if Germany civil society had hoped for a more ambitious text, the agreement sends a strong message that the momentum for EU-wide due diligence legislation is gaining important ground.

Brussels should use the German announcement as a springboard for a Europe-wide framework that provides judicial remedy for overseas victims, as well as legal certainty and a level-playing field for all businesses operating in the EU.

Members of the European Parliament will be able to have their say on the issue at next month’s plenary session. We strongly urge them to vote in favour of MEP Lara Wolters’s report on corporate due diligence, calling on the European Commission to increase scrutiny of companies over the impact their operations have on the environment and people globally.

We call on all MEPs to adopt amendments for an over-riding mandatory provision to ensure that EU civil liability rules are applied in cases against EU companies in EU courts; rather the ‘law of where the harm occurred’.

The result of this vote will likely shape the Commission’s legislative proposal, expected in the second quarter of this year.