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Today many companies in Germany face increasing pressure to comply with multiple environmental, social, and governance (ESG) reporting standards. Among these, the German Supply Chain Due Diligence Act (LkSG) and the EU Corporate Sustainability Reporting Directive (CSRD) stand out for their comprehensive requirements.
Companies subject to both laws can streamline their compliance efforts by adopting a unified approach to due diligence and reporting. Here’s how companies can prepare to meet the obligations of both LkSG and CSRD without duplicating work:
1. Human Rights Risk Assessment
Both LkSG and CSRD require robust human rights risk assessments. For example, a manufacturing company can use our LkSG risk management software to identify and assess risks of child labor in its supply chain. By integrating this process with the CSRD’s requirements, the company can document the preventive measures taken and the positive outcomes achieved.
2. Environmental Risk Management
Environmental due diligence is a critical component of both laws. For instance, a textile company might face risks related to water pollution from dyeing processes. Our software can help monitor these risks and implement corrective actions, which can then be reported under CSRD.
3. Preventive and Corrective Actions
To avoid redundancy, companies should establish a unified process for implementing preventive and corrective actions. For example, a food processing company might discover forced labor in its supply chain. Using our software, they can implement corrective measures and track their effectiveness, fulfilling both LkSG and CSRD requirements.
4. Transparency and Public Reporting
Transparency is a cornerstone of both LkSG and CSRD. A technology company can use our software to consolidate its due diligence activities into a single, comprehensive sustainability report. This report can include data on carbon emissions, labor practices, and corrective actions taken, ensuring compliance with both laws.
5. Training and Capacity Building
Training is essential for effective compliance. For instance, a logistics company can provide training on human rights and environmental standards to its employees and suppliers and create a record on our software as evidence. This ensures you are appropriately providing necessary training, documenting including acceptance of your supplier code of conduct by the suppliers.
6. Integration into Business Processes
Integrating ESG considerations into core business processes is vital for streamlined compliance. For example, an Automotive company can consider the outcome of the due diligence process in its procurement system such as sourcing, ensuring that human rights and environmental impacts are considered when selecting suppliers.
7. Reporting
Effective reporting to regulators is required by both laws. The user of our ESG Suite can prepare their draft report using our software. This helps a company to standardize their ESG reporting practices in a centralized software solution.
To discover more about our ESG Suite and LkSG Risk Management Software, contact us here.
On March 15, 2024, the European Council reached an agreement on the Corporate Sustainability Due Diligence Directive (CSDDD). The Belgian Presidency of the European Council circulated an adapted proposal for the CSDDD as a final attempt to reach an agreement among the Member States and with success: the required (qualified) majority was achieved within the European Council. The formal adoption of the CSDDD by the Members of the European Parliament is expected in April 2024.
But how does this directive differ from the German Supply Chain Due Diligence Act (LkSG)? And how do they relate to each other? In this blog post, we will highlight the similarities and differences between the CSDDD and the LkSG.
Exploring Similarities Between LkSG and CSDDD: Seeking Common Ground
Both laws aim to hold companies accountable and oblige them to organize their supply chains responsibly. Both the Supply Chain Due Diligence Act (LkSG) and the Corporate Sustainability Due Diligence Directive (CSDDD) set out comprehensive due diligence obligations for human rights and environmental protection along the supply chain. This means that companies are obliged to identify and report on the potential negative impacts of their business activities and to take measures to minimize or prevent negative impacts. Both laws also provide for sanctions that companies face if they violate the stipulated regulations. This can include fines and exclusion from public contracts.
Highlighting Contrasts: Key Differences Between LkSG and CSDDD
The main difference between the German Supply Chain Due Diligence Act (LkSG) and the EU Corporate Sustainability Due Diligence Directive (CSDDD) lies in their scope of application and legal structure. The LkSG applies to companies of any legal form in Germany and is staggered according to company size, whereby it has applied to companies with more than 3,000 employees since 2023 and to companies with more than 1,000 employees since January 2024.
In contrast, the CSDDD applies gradually to corporations in the EU and to non-EU companies that exceed a specified number of employees and a turnover threshold in the EU single market. Large companies with more than 5,000 employees and a minimum turnover of 1.5 billion euros are obliged to comply with the directive three years after its enactment, likely in 2027. Companies with more than 3,000 employees and a minimum turnover of 900 million euros have four years (potentially until 2028), and companies with more than 1,000 employees and a minimum turnover of 450 million euros have five years (potentially until 2029 2029) until they are subject to the law.
Another difference involves the specific requirements and concerns covered by the laws. While the LkSG focuses primarily on human rights and direct environmental risks, the CSDDD expands its scope to include additional environmental concerns such as climate targets, the protection of flora and fauna and the minimization of environmental impacts along the “chain of activity”. The "chain of activity" includes all upstream activities that are related to the production of goods, the company’s own operations and downstream activities for distribution, transport and storage for direct business relationships. Usage and disposal of the product are not in scope.
Furthermore, there are distinctions regarding liability within the two laws. While the LkSG does not provide for civil liability, the CSDDD does, but only within its own sphere of influence and in accordance with the provisions of the German Civil Code (BGB). There are also differences in the sanctions: While the LkSG provides for fines of up to 2% of annual turnover and exclusion from public sector contracts, the CSDDD provides for fines of up to 5% of annual turnover, in addition to publication of the infringement and a ban on the marketing or export of products and services.
Wrapping Up: Key Takeaways from the Comparison of LkSG and CSDDD
In conclusion, the comparison between the German Lieferkettensorgfaltspflichtengesetz and the EU Corporate Sustainability Due Diligence Directive reveals significant similarities and differences. While both aim to hold companies accountable for their supply chains, the LkSG applies to German companies based on employee count, whereas the CSDDD applies to specific company forms across the EU, based on employee count and turnover. Additionally, the CSDDD extends its scope to address a broader range of human and environmental concerns along the upstream and partially downstream supply chain. Understanding these distinctions is crucial for businesses navigating compliance and sustainability efforts in the evolving regulatory landscape.
The Lieferkettensorgfaltspflichtengesetz (LkSG) compliance requires a nuanced approach that goes beyond the functionality of tools like Excel. Considering the operational realities and challenges faced by companies in the last 2 years, a structured comparison between using Excel and SupplyOn's LkSG Risk Management Software illustrates a clear choice for companies looking to fulfill LkSG requirements this year.
Excel for LkSG Compliance: Operational Realities
1. Data Management and Integrity Challenges:
In Excel, maintaining the integrity of vast amounts of supplier data across complex supply chains can lead to significant discrepancies, risking non-compliance.
Excel lacks automated alerts for data anomalies or updates, placing the burden of continuous data checks on you.
2. Risk Assessment Limitations:
Performing dynamic risk assessments with Excel is cumbersome. The manual aggregation and analysis of data to identify risks among direct and indirect suppliers are prone to oversight and inaccuracies.
3. Collaboration and Reporting Inefficiencies:
Excel’s static nature hampers real-time collaboration. Sharing updated risk assessment and status quo with customers can be delayed, leading to outdated decision-making.
Preparing compliance reports for regulatory bodies is 100% manual and time-intensive, diverting resources from strategic compliance activities.
SupplyOn's LkSG Risk Manager: A Structured Approach
1. Enhanced Data Management:
SupplyOn provides a centralized platform for managing supplier data, ensuring high data integrity and accessibility. It automatically updates and flags inconsistencies, facilitating proactive compliance management.
The platform's supplier mapping feature offers a comprehensive view of the supply chain, including indirect suppliers, significantly reducing the risk of oversight.
2. Sophisticated Risk Analysis:
The tool conducts abstract risk analysis considering both country risk and granular level product risk that were developed on the basis of BAFA recommended risk databases. This enables precise identification of high-risk suppliers in preliminary scoring.
Based on the abstract risk scoring, the tool detects the high risk suppliers and sends concrete risk specific survey questions – but only for the high risks to keep effort minimal for suppliers.
Automated risk prioritization feature on the tool allows to focus on appropriate risks and apply necessary measures.
Conduct preventative and remedial actions and track the effect of the measures to have a better view on risk reduction.
3. Streamlined Collaboration and Reporting:
SupplyOn fosters real-time collaboration among all internal users including suppliers. This ensures that everyone is informed and can act promptly on required matters.
Streamlined creation of BAFA report using the designated fields ensures high accuracy of a better report.
The Structured Advantages of SupplyOn over Excel
Automated vs. Manual Processes: Where Excel relies on manual entry and analysis, SupplyOn automates risk assessments, data management, and reporting, significantly reducing the potential for human error and increasing efficiency.
Dynamic Risk Management:Unlike Excel’s static data sets, SupplyOn offers dynamic risk management capabilities, automatically adjusting risk priorities as new data becomes available or as the supply chain evolves.
Integrated Compliance Framework: SupplyOn provides an all-in-one platform for LkSG risk management, from supplier mapping and risk analysis to measure management and reporting. Excel, by contrast, requires multiple spreadsheets and manual integration of data for a comprehensive view.
Resource Optimization: SupplyOn's streamlined and automated processes free up valuable resources, allowing companies to allocate more time to strategic initiatives rather than tedious manual compliance tasks.
In summary, while Excel may offer a familiar interface, it falls short in addressing the real-world challenges of LkSG compliance. SupplyOn's LkSG Risk Manager, with its structured approach to data management, risk analysis, collaboration, and reporting, offers a comprehensive and efficient solution. This platform not only simplifies compliance efforts but also enhances the strategic capability of companies to manage their supply chain risks proactively.
Click here to request a software demo from our LkSG experts
As a SME operating within Germany's dynamic market landscape, the enactment of the Lieferkettensorgfaltspflichtengesetz (LkSG) brings both a challenge and an opportunity to redefine your approach to supply chain management. With a workforce of 1,000 to 3,000 employees, your company is at a pivotal size—large enough to have a significant impact on your supply chain but agile enough to adapt swiftly to new regulations.
Here's how you, as an SME, can proactively embrace LkSG compliance as a core part of your business ethos:
1. Embracing Your Role in Global Sustainability
First and foremost, you should recognize your responsibility towards ensuring that your operations and supply chains respect human rights and environmental standards. The LkSG is not merely a regulatory requirement; it aligns with your commitment to ethical business practices and sustainability. Understanding the spirit of this law is the foundation of your compliance strategy.
2. Conducting Thorough Risk Assessments
With your extensive network of suppliers, conducting a thorough and continuous risk assessment is crucial. You can implement a comprehensive evaluation system, identifying potential risk areas across your direct and indirect supplier universe. This proactive approach will enable you to address issues before they escalate.
3. Crafting a Clear Policy Statement
Your commitment to ethical supply chain practices should be encapsulated in a publicly available policy statement. This document, accessible to all stakeholders, should outline your approach to maintaining LkSG compliance and underscore your dedication to transparency and accountability.
4. Implementing Rigorous Due Diligence Procedures
You should establish structured due diligence processes, incorporating regular audits, supplier assessments, and contractual compliance clauses. You should think that your dedicated resource should work on such topics and collaborate with internal compliance team members.
5. Taking Prompt Remediation Actions
In instances where supply chain violations are identified, you should be committed to taking immediate and effective action. This could range from working directly with suppliers to correct the issues, to severing ties with non-compliant partners. Your goal is to address problems in a way that fosters long-term improvements and respects affected individuals or communities.
6. Ensuring Transparency through Reporting
Annually, you should publish detailed reports on your supply chain due diligence efforts, findings, and the measures you have taken to address any issues. This level of transparency not only meets LkSG requirements but also builds trust with your customers, partners, and the broader public.
7. Fostering a Culture of Awareness and Training
Understanding that compliance starts with awareness, you should invest in regular training for your employees and suppliers. Educating them about the LkSG, its implications, and your collective role in upholding its standards is essential for embedding ethical considerations into every aspect of your operations.
8. Committing to Continuous Improvement
Compliance for you should be an ongoing journey. You should continually review and refine your processes, staying abreast of best practices, and adapting to new regulations such as CBAM, CSRD Reporting and even in future EU Forced Labor law.
9. Collaborating for Greater Impact
You should believe in the power of collaboration. Engaging with your suppliers, industry peers, and other stakeholders should allow you to share insights, challenges, and solutions. Together, you can drive more significant, industry-wide changes towards more responsible supply chains.
10. Leveraging Technology for Compliance
To streamline your compliance efforts, leveraging software solutions will make your journey much more streamlined and efficient such as automatically collecting data from suppliers, understand their risk levels, applying pre defined measures, track the effectiveness of the measures and create regulatory reports like for BAFA in appropriate manner.
To learn how SupplyOn’s LkSG Risk Management Software can simply your LkSG journey in just 48 hours, contact us here.
