Corporate Accountability in Global Supply Chains: The Push for Ethical Business Practices

With businesses operating across borders, public scrutiny has grown over exploitative practices like child labor, unsafe working conditions, and environmental degradation in global supply chains. Recent legislative efforts, such as Germany’s Supply Chain Due Diligence Act (SCDDA) and the European Union’s Corporate Sustainability Due Diligence Directive (CSDDD), aim to enforce corporate responsibility by requiring companies to identify, prevent, and address the risks of human rights abuses and environmental harm within their supply chains. These laws mark a significant shift in international law, compelling businesses to adopt transparent, ethical practices or face legal and financial consequences.

Germany’s SCDDA, effective as of January 2023, requires companies to identify and mitigate human rights and environmental risks in their operations and supply chains. Initially, it applied to firms with at least 3,000 employees, and has extended to those with 1,000 employees in 2024. The core elements of the due diligence obligations involve implementing a risk management system to identify, prevent, or mitigate risks related to human rights violations and environmental harm. The SCDDA outlines the required preventive and corrective actions, mandates complaint procedures, and calls for regular reporting. Under the SCDDA, the due diligence obligations cover an enterprise’s operations, its contractual partners’ activities, and those of indirect suppliers. This means that an enterprise’s responsibility now encompasses the entire supply chain, going beyond its own facilities. Supervised by the Federal Office for Economic Affairs and Export Control, if enterprises fail to comply, significant penalties can be given, including fines of up to 8 million euros or 2% of the company’s global turnover. Additionally, non-compliance can lead to exclusion from public procurement contracts in Germany.

The European Union’s CSDDD, passed in 2024, builds on Germany’s framework, applying to both EU-based and foreign companies operating in the EU market. The CSDDD mandates corporate accountability for adverse human rights and environmental impacts caused directly or through supply chains. In addition, the CSDDD sets out an obligation for large companies to adopt and put into effect, through best efforts, a transition plan for climate change mitigation aligned with the 2050 climate neutrality objective of the Paris Agreement as well as intermediate targets under the European Climate Law. The CSDDD will be rolled out in stages, starting with larger companies. Beginning in 2027, the Directive will apply to: (a) EU companies with over 5,000 employees and 1.5 billion euros in net global turnover; and (b) non-EU companies with 1.5 billion euros in net turnover generated within the EU. Violations of certain CSDDD obligations may lead to civil liability for damages. Additionally, member States are required to enforce penalties for non-compliance, including financial penalties set at a minimum of 5% of the company’s global net turnover. However, companies cannot be held liable for damages caused by their business partners within their activity chains.

Article Written by Ryleigh Peterson

Sources:

Supply Chain Act, Act on Corporate Due Diligence Obligations in Supply Chains, Federal Ministry of Labour and Social Affairs, available at https://www.csr-in-deutschland.de/EN/Business-Human-Rights/business-human-rights.html.

Corporate Sustainability Due Diligence, Fostering Sustainable and Responsible Corporate Behaviour for a Just Transition Towards a Sustainable Economy, European Commission, available at https://commission.europa.eu/business-economy-euro/doing-business-eu/sustainability-due-diligence-responsible-business/corporate-sustainability-due-diligence_en.

Mike Scott, ESG Watch: New European Human Rights Rules Leave Companies with ‘Big Gap to Close,’ Reuters (July 11, 2024), available at https://www.reuters.com/sustainability/society-equity/esg-watch-new-european-human-rights-rules-leave-companies-with-big-gap-close-2024-07-11.

Landmark EU “Corporate Sustainability Due Diligence Directive” Imposing Human Rights and Environmental Due Diligence Obligations on EU and Non-EU Companies Approved by European Parliament, Gibson Dunn (April 30, 2024), available at https://www.gibsondunn.com/landmark-eu-corporate-sustainability-due-diligence-directive-imposing-human-rights-and-environmental-due-diligence-obligations-on-eu-and-non-eu-companies-approved-by-european-parliament.