Summary: Various incidents have shown that companies do not take responsibility for their global supply chains. Laws obeying them to do so seems the logical solution. So, why are we still discussing it? In the following, we show that supply chain laws can positively influence economic growth, explain why politicians are still hesitant to put such laws into action, and we take a look at the current situation in Germany where the German population is demanding a supply chain law that pressures companies to take more accountability and responsibility.
The driving force of a company - its sales figures - cannot be the reason for it since compliance with ethical and legal requirements, such as human rights, do not negatively influence the economic performance of companies, as Goliathwatch shows. According to a study in 2013 from PWC, companies can achieve an increase in economic performance of 70% when acting responsibly. Futhermore, leading companies in the sustainability sector like the German sports equipment and outerwear company, Vaude, swear by human rights and nature conservation as a competitive advantage. Ecovadis confirms this in its recent blog post “The ROI of Sustainability”. Pepsi, for example, was able to reduce its operational water consumption by 26% only through analysing its processes, saving almost $80 million.
But it is not only in times of business-as-usual that companies can benefit from knowledge about their supply chains. The coronavirus pandemic has revealed that companies that make their supply chains compliant with the law, and take human rights and nature conservation seriously, generally fare better through crises. For knowledge about their own supply chains is power and leads to resiliency in production, making companies more sustainable.
The fact is: Supply chains are not designed for transparency. In the course of globalization, the degree of specialization and international networking in supply chains has increased. Let's take the example of the automotive industry: a car manufacturer has around 17,000 suppliers. From these it purchases 140 billion parts per year, which are processed in 130 plants in 24 countries. On average, each part crosses a border four times before it is installed in a vehicle. Not least because of cost advantages, these widely ramified supply chains are often located in countries of the global South, where lower environmental and social standards apply. An “out of sight, out of mind” mentality is common. Moreover, companies and suppliers fear that the disclosure of too much information will undermine their competitive advantage or - in many cases rightly so - expose them to criticism.
Furthermore, bringing transparency into supply chains is an expensive and lengthy task, because the data is missing. It is rare for companies to collect relevant information, such as details of practices in the upstream supply chain. And if they do exist, there is always the likelihood that they are incorrect. Making supply chains transparent is therefore costly and the ROI for transparency does not match the short-term business needs of a company. This has corresponding implications, as this Oxfam's list of human rights violations shows.
Economic growth is also a reason for politicians not to intervene in the free market - especially in Germany. Instead of introducing a legally binding Lieferkettengesetz, the government has been relying on voluntary measures. These have not led to much success so far as the two-year monitoring of the German government shows: Out of 2250 interviewed companies only 455 reported a valid answer, resulting in the fact that significantly less than 50 percent of these companies were complying with their corporate due diligence obligations.
TThe focus on voluntary measures has been strongly influenced by the lobbying pressure of trade associations, as the research of the Global Policy Forum shows. The aim is to give the economy as much freedom as possible. The result: Delayed and watered-down legislation which is meant to monitor a companies' care of and responsibilities for their global supply chains.
But the market is changing. After catastrophes like Rana Plaza in 2013 or the literally sewn in calls for help from seamstresses in Asia, consumers are putting more pressure on companies and demanding transparency. Since shoppers, usually riding the endorphrin-rush high of a low-cost, fast fashion bargain or sale, do not want to be faced with a guilty conscience. Politicians are also feeling the pressure: 222,222 people across Germany have signed the demands of the Initiative Lieferkettengesetz and a representative survey shows that 75% of the German population is in favour of a Lieferkettengesetz.
It seems that the demands from the various stakeholders in this discussion are coming to a head, and politicians must mediate now. While little is publicly known, the federal ministries in Germany are currently wrestling fiercely over the contents of a Lieferkettengesetz. For a Lieferkettengesetz to be effective, it would have to meet certain minimum requirements:
It must oblige companies to exercise care throughout the value chain. To this end, the law must not fall short of the requirements set out in the UN's guiding principles for business and human rights, and must ensure that companies analyse their risk, take effective action and report on it.
It must recognise the link between human rights violations and environmental degradation: For environmental damage resulting from economic activities often also endangers fundamental human rights. The cases of contaminated drinking water or cleared forests show this: Environmental protection and the protection of human rights belong together.
It must empower a state authority to monitor compliance with human rights and environmental protection standards and give it the power to sanction companies that disregard them. For example, by imposing fines or excluding companies from public contracts and foreign trade promotion.
It must allow civil liability where damage has occurred. It must allow those affected by human rights violations abroad to claim damages from companies before German courts if they have not taken appropriate due diligence measures.
It must not only apply to very big companies but must also consider small companies in sectors with high human rights risks, such as textiles, automobiles, or chemicals.
Germany is not the pioneer of introducing a national Lieferkettengesetz. The USA, Australia, Switzerland, France, the UK, the Netherlands and Austria, as well as the European Union, already have corresponding directives and regulations in place that enable and encourage companies to exercise their supply chain responsibilities. These laws also affect companies from Germany because they export or supply goods to the respective countries. Thus, a German Lieferkettengesetz could close legal gaps in Germany and is part of a trend towards binding corporate responsibility.
We at retraced consider it self-evident that companies act transparently and responsibly - even if this still sounds like a dream when you look at the current 'business-as-usual' climate. Our society needs companies that respect ecological interrelationships, promote the common good and operate in a future-oriented manner. We need businesses that prioritize added value and appreciation at the same time, without social- or greenwashing.
What do you think of the demands for a Lieferkettengesetz? Is it still too lax or will it cause severe interference in a free market economy? We look forward to a lively discussion on our social media channels!
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