Understand the impacts of the German supply chain law for Brazilian companies

On January 1, 2023, the Law on Corporate Due Diligence to Prevent Human Rights Violations in Supply Chains comes into force in Germany (Gesetz über die unternehmerischen Sorgfaltspflichten zur Vermeidung von Menschenrechtsverletzungen in Lieferketten, also called Lieferkettensorgfaltspflichtengesetz – LkSG). Although the different national legal systems are, in principle, territorially limited, the new German law is expected to produce effects beyond German borders and impact companies around the world, including in Brazil.

From a formal point of view, the law will be applicable, in 2023, only to companies with 3 or more employees in Germany and, from 2024, to companies with 1 or more employees in that country. Even though it is aimed at German companies, the law will certainly have extraterritorial effects, because it obliges companies to carry out due diligence to prevent the occurrence of human rights violations throughout its supply chain, encompassing all suppliers of products and services, from the extraction of raw materials, to the delivery of the finished product or the provision of services to its customers.

Compliance with due diligence obligations by German companies will be monitored administratively and, if companies do not comply with their obligations, they may be fined and prevented from contracting with the public administration in Germany.

Therefore, it is expected that German companies will begin to make demands related to the fulfillment of obligations linked to human rights in their contractual relationships, imposing European regulatory standards on their suppliers, wherever they are, and obligations to repair damages, upon non-compliance.

Furthermore, German companies subject to the law must create procedures for receiving complaints from people impacted by their activities, in Germany or abroad. This opens up space for trade unions and civil society associations around the world to denounce human rights violations committed by local suppliers of German companies, which can become an effective means of pressuring them to adopt better practices.

In cases of human rights violations by a supplier of a German company, the law also establishes the obligation for the company to remedy the violation and adopt measures to end it, and may even suspend commercial relations with the supplier as a form of pressure you into conformity. In this context, companies that supply products or services to German companies are encouraged to adopt internal human rights policies to guarantee that they meet the required standards, under the risk of otherwise leading to contractual termination.

Finally, whether for the fulfillment of contractual obligations, or to avoid international exposure in complaints made by local entities to their German customers or even as a competitive advantage over competitors, German law creates incentives for suppliers from other countries to be concerned about their internal human rights policies, even if they are not subject to German law.

The German initiative follows recommendations from the United Nations, which, in 2011, approved the Guiding Principles on Business and Human Rights, establishing guidelines for companies to protect and respect human rights, as well as remedy any violations. In 2017, France approved Surveillance Law No. 2017-399, which also provides for transnational companies operating in the country to monitor their production processes to identify risks and prevent human rights violations. Furthermore, the approval of a Directive is being discussed in the European Parliament so that all European Union countries can adopt similar guidelines.

The duty of due diligence in matters of human rights may, therefore, be following the same path as competition, food safety and data protection standards, topics on which European standards are considered global references. The General Data Protection Regulation (GDPR, also known by its English acronym GDPR) is one of the main examples of the phenomenon named by Anu Bradford as the “Brussels effect”. The expression has been used by the author to designate the regulatory capacity of the European Union to impose its standards on the rest of the world, as a result of its market power, its high institutional capacity and its predisposition to adopt rigorous regulations as a precondition for access. to your market.

The GDPR resulted in the development of data protection standards in several countries, in addition to contributing to reforms of global data protection policies in several multinational companies. The new German law may be an indication that a similar movement is taking shape around compliance obligations related to the protection of human rights imposed on companies. Therefore, companies around the world must be prepared to incorporate environmental, social and corporate governance parameters (Environmental, Social and Governance – ESG) in its production processes and create internal human rights policies and compliance manuals, as this could very soon become a condition for access to the international market.

By Michele Hastreiter, lawyer in the Corporate Department at Andersen Ballão Advocacia