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  • 04/2024
  • Dr. Lothar Harings, Max Jürgens , Stefanie Beermann
Focus Area

Using Certificates and Standards to Comply with Supply Chain Due Diligence Obligations

As the legal requirements for risk analysis in supply chains increase, so does the importance of control instruments to prevent infringements and remedy irregularities.

Contributing to fair wages for local coffee farmers, selecting suppliers that dispose of hazardous waste in an environmentally friendly manner, sourcing wood from sustainably managed sources - many companies considered guaranteeing human rights and sustainability in the supply chain to be optional criteria in their business relationships. With the introduction of the German Supply Chain Due Diligence Act (LkSG), German companies with 1,000 or more employees in Germany have been legally obliged to identify and assess environmental and human rights risks both within their own organisation and at their suppliers and to take action against violations of certain human rights and environmental rights.

At European Union (EU) level, numerous legislative proposals are currently being discussed and adopted that deal directly or indirectly with supply chain-related due diligence obligations. These include the EU Deforestation Regulation (EUDR), the Corporate Sustainability Due Diligence Directive (CSDDD), the Corporate Sustainability Reporting Directive (CSRD), which was already adopted in 2023, and the regulation banning the provision of products manufactured using forced labour (EU Forced Labour Ban or EU Forced Labour Regulation, FLR).

What all of these regulations - LkSG, EUDR, CSDDD, CSRD, FLR - have in common is that they directly or indirectly require compliance with certain legal provisions, for instance labour rights, along the supply chain. Certificates and standards play a central role in the context of the regulations.

The LkSG as a Starting Point

In the context of the LkSG, a distinction must be made between protected legal rights and due diligence obligations to be met within the company. In simple terms, the legal provisions listed in international conventions in the Annex to the LkSG define the objective of due diligence obligations. In the context of the LkSG, voluntary human rights or environmental standards in the form of inspections and audits can, according to the explanatory memorandum to the law (BT-Drucksache 19/28649, p. 48), support the implementation of due diligence obligations, in particular in taking preventive measures. Depending on the design of a standard, these can provide a guarantee of compliance with certain protected legal rights and the implementation of due diligence obligations for the certified company. The implementation process for achieving a standard can itself fulfil individual due diligence obligations - in particular for the prevention and remediation of violations.

Product-Related Due Diligence Obligations of the EUDR

The EUDR came into force on 29 June 2023. The due diligence obligations contained therein must be complied with from 30 December 2024 (for small and micro enterprises only from 30 June 2025). According to the EUDR, relevant raw materials and relevant products may only be introduced into the EU market, made available on the EU market or exported from the EU if they are (1) deforestation-free, (2) produced in accordance with the relevant legislation of the country of production and (3) covered by a due diligence declaration.

The so-called "relevant products" concerned include products made from cattle, cocoa, coffee, oil palm, rubber, soya and wood and are listed in Annex I of the EUDR. "Deforestation-free" means that the production areas have not been deforested after 31 December 2020. In the case of wood, there must also have been no damage to forests after 31 December 2020.

The "relevant legislation" to be observed in the producing country includes national legal provisions such as land use rights, environmental protection regulations, forest-related regulations, labour rights, human rights protected under international law in general, as well as national tax, anti-corruption, trade and customs regulations.

Natural rubber harvested in Malaysia. The supply chain of the raw material is vulnerable to violations of human rights and environmental standards. © Nafise Motlaq / World Bank

Companies - with the exception of small and medium-sized enterprises (SMEs) that make products available on the EU market, so-called SME traders - must submit a due diligence declaration to an EU information system. The due diligence declaration contains numerous data on the product, including the country of production and the geolocalisation of all sites on which the relevant raw materials were produced. The due diligence declaration must also confirm that certain due diligence obligations have been met by the company and that the raw materials originate from deforestation-free land and have been produced in accordance with the relevant legislation of the country of production. Companies are liable for the accuracy of the information provided in the due diligence declaration - violations can result in fines, confiscation of the relevant products, the imposition of an import ban or exclusion from the award of public contracts.

Standards and certificates are especially important in ensuring compliance with the relevant legal provisions in the country of production, so that EU companies can fulfil their due diligence obligations under the EUDR in future and issue a due diligence declaration. Audits are also explicitly mentioned as risk minimisation measures in Art. 11 EUDR.

Compromise Proposal on the CSDDD

On 15 March 2024, the Council of the European Union confirmed the CSDDD in the Committee of Permanent Representatives (Coreper). The directive is expected to be adopted shortly. This will be followed by a two-year implementation period for national legislators – in Germany’s case, to amend the LkSG. Similar to the German LkSG, the Directive requires economic operators to implement a series of due diligence obligations in relation to the supply chain. The scope of application of the CSDDD is not as extensive as that of the LkSG. Nevertheless, numerous companies within the EU will have to comply with the due diligence obligations under the CSDDD in future and pass on certain obligations in the supply chain. This includes ensuring that suppliers comply with a range of protected legal rights, which can be documented with the help of standards or certificates. The CSDDD is therefore likely to increase the need for certification processes, particularly against the backdrop of stricter civil liability.

Reporting Obligations Under the CSRD

The CSRD has been in force for some time and must be transposed into national law by Germany by July 2024. It requires companies to provide information on sustainability issues in their annual reports. The reports must - in parallel with financial reporting - be certified by auditors. The CSRD does not contain a catalogue of due diligence obligations that must be fulfilled in relation to suppliers. However, as the general human rights situation in the supply chain must be reported on, standards and certificates will also become more important here. After all, a certificate issued in respect to human rights can provide information on whether and to what extent the supply chain is affected by (potential) violations.

Import Bans on the Basis of the FLR

In March 2024, the EU Parliament announced that the Commission, Council and Parliament had reached a political agreement on a draft regulation to ban products manufactured using forced labour. The FLR is to be adopted in the course of 2024 and is expected to enter into force in 2027.

The FLR does not contain any new supply chain-related due diligence obligations. However, it prohibits the placing on the EU market, the making available on the EU market and the export of products manufactured using forced labour. The FLR thus imposes a new legal consequence on the result of an inadequate risk analysis or inadequate remedial measures: If the existing due diligence obligations (e.g. from the CSDDD or the LkSG) do not lead to an end to forced labour in the supply chain, the import or provision of products on the Union market can be prohibited, for example. With regard to the prevention of forced labour, the FLR therefore introduces a de facto obligation to succeed - forced labour must be excluded from the supply chain.

In order not to jeopardise the marketability of their products, companies must therefore precisely analyse and exclude forced labour risks in the supply chain. Risk analysis and remedial measures in the area of forced labour risks are therefore becoming considerably more important.

It is true that evidence of forced labour in the supply chain must be provided by the EU Commission or the national authorities. However, companies are included in the investigations and can thus provide their own evidence of compliance with the ban on forced labour - for example through implemented standards and certificates.

LkSG, EUDR, CSDDD, CSRD, FLR - and Certificates?

The verification of compliance with relevant legal provisions should be implemented directly (LkSG, EUDR, CSDDD) or indirectly (CSRD and FLR) by means of a risk analysis, among other things, in which abstract risks are assessed and then specifically tracked. As soon as risks have been concretely identified, preventive and corrective measures must be taken (LkSG, EUDR, CSDDD).

A certificate that verifies certain protected legal rights as part of an audit by an independent auditor at the supplier's premises offers a relatively high guarantee that the abstract risk identified does not actually exist. Resources of risk analysis can thus be focussed on other suppliers identified as potentially risky. This not only saves human and financial resources, it also leads to a concentration of measures on suppliers where there are actually concrete risks.

Creating transparency in the timber trade is challenging. Worker at a sawmill in Kisumu, Kenya. © Peter Kapuscinski / World Bank

Particularly in the context of the EUDR, checking compliance with the relevant legislation in the country of production is likely to be difficult for many EU-based market participants, as they do not generally have the resources to carry out on-site inspections, for example. In contrast to the LkSG and the CSDDD, the EUDR follows a product-based approach, which means that small and medium-sized enterprises must also fulfil all due diligence obligations when importing relevant products into the EU. SMEs are to benefit from simplifications in that they can refer to due diligence declarations that have already been issued and therefore do not have to carry out any independent checks. In the practically relevant case of imports, however, there will in many cases be no previous due diligence declaration - importing SMEs will therefore be affected by the EUDR in the same way as all companies involved in the import process.

Accordingly, many companies will have to use third-party suppliers to eliminate specific risks with producers or to take preventative action against identified risks. A similar way pattern is to be expected within the framework of the FLR in order to completely and verifiably exclude forced labour risks and thus avoid an import or supply ban.

The FSS as a Practical Example

The Food Security Standard (FSS) was developed by Welthungerhilfe and the WWF in cooperation with the Centre for Development Research and with the support of the BMEL as a supplement to existing certification processes specifically to guarantee the Right to Food. Due to the relevance of the Right to Food for other human rights, FSS certification also verifies and guarantees compliance with further human rights as well as environmental obligations.

The FSS and its accompanying programmes (Food Security Sensitive Management - FOSSEM, Quick Assessment Tool - QAT) contain corresponding verification mechanisms for compliance with a large number of legal rights, compliance with which is also required by the aforementioned regulations. These include, for example, land use rights, environmental protection, third-party rights, labour rights and human rights protected under international law (especially the Right to Food, but also women's rights, the right to a fair wage, freedom of association, etc.).

Conclusion: Certificates as an Important Building Block

With the growing number of supply chain and product-related due diligence obligations, the importance of certificates and standards will increase in the future. However, they are only one component of supply chain-related due diligence obligations. They address specific aspects of due diligence obligations and must be embedded in a broad-based risk management system. But caution is advised: Not all certificate providers deliver what they promise! When selecting suitable standards, it is important to ensure that independent on-site audits are carried out and to check which human rights and environmental risks are addressed, if any.

The integration of certificates and standards such as the FSS into the corporate strategy is an essential step towards fulfilling the requirements of the LkSG, the EUDR, the CSDDD, the CSRD and the FLR. They not only provide a clear framework for compliance with due diligence obligations, but also strengthen stakeholder confidence in the social and environmental responsibility of companies.

Dr. Lothar Harings Law Firm GvW Graf von Westphalen, Hamburg
Max Jürgens Law Firm GvW Graf von Westphalen, Hamburg
Stefanie Beermann Law Firm GvW Graf von Westphalen, Hamburg

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