Sustainability Check and Supply Chain Management

"Stakeholders worthy of consultation" are individuals, groups, or entities who have a legitimate interest in or are significantly affected by the organisation's supply chain operations and decisions. These stakeholders have valuable perspectives, knowledge, and concerns that should be considered and addressed when making supply chain decisions. 

Identifying stakeholders worthy of consultation is an important aspect of stakeholder engagement and inclusive decision-making in supply chain management.  It involves recognising that the organisation's actions can have direct or indirect consequences on diverse parties, and that their feedback can help to improve decision-making and produce more sustainable results. 

Stakeholders worthy of consultation in the supply chain may include: 

1. Customers: Because they consume or utilise the products or services, customers play an important part in the supply chain. Their suggestions, preferences, and needs should be taken into account in order to ensure client satisfaction and improve product offers. 
2. Suppliers: Suppliers are essential patners in the supply chain because they provide raw materials, components, or completed goods. Consultation with suppliers helps in the establishment of effective collaboration, the resolution of any complaints or challenges, and the development of mutually beneficial relationships. 
3. Employees and labour unions: The organisation's workforce, as well as any labour unions, are key stakeholders in the supply chain. Consultation with employees and labour representatives can assist in resolving labour-related concerns, ensuring fair working conditions, and gathering ideas on how to improve productivity and employee well-being. 
4. Local communities: The supply chain operations of businesses may have a direct impact on the communities in which they operate. Consultation with the local community can assist in identifying and addressing any social or environmental concerns, as well as ensuring respect for local practises and cultures and fostering beneficial connections.  Residents and other users of properties next to production sites should also be included. 
5. Regulatory authorities: Compliance with regulations and industry standards is crucial in the supply chain. Consultation with regulatory authorities ensures compliance with legal requirements, permits, and certifications, as well as keeping up with any changes or new legislation. 
6. Non-governmental organisations (NGOs) and advocacy groups: NGOs and advocacy groups frequently focus on specific social, environmental, or ethical issues. Through engagement with these stakeholders, companies may gain insights, address problems, and collaborate on sustainability initiatives or ethical practises. 
7. Groups of people who are vulnerable: Migrants and people with disabilities are examples of such groups.  Within these supply chains, the company should prioritise concerns such as forced labour and responsible recruitment, worker safety, and gender equity.  People with disabilities are part of human diversity.  Consult with people with disabilities and their advocacy groups.  When striving for a sustainable and inclusive supply chain, it is critical to engage with these stakeholders and manage their challenges. 

Consulting with stakeholders worthy of consultation allows companies to obtain a broader perspective, establish trust, and improve the social and environmental performance of their supply chain. Organisations may discover potential risks, opportunities, and innovative solutions that contribute to long-term success and sustainability by actively engaging with these stakeholders.

Duty to Implement 

The "duty to implement" refers to an organisation's responsibility or obligation to implement or execute certain supply chain management-related processes or procedures.  The implementation responsibility falls to management.  It can be delegated to managers, who will retain selection, supervision, and organisation responsibilities.  

This responsibility entails the implementation of various strategies, practises, and systems required to manage the supply chain effectively and ensure its smooth operation. It involves translating supply chain plans, policies, and objectives into actionable initiatives and actions. 
 

Duty to succeed 

"Duty to succeed" refers to an organisation's obligation or responsibility to strive for and achieve success in its supply chain operations. Even if it means severing ties with the supplier, it implies a commitment to meeting objectives, delivering value, and continually improving performance within the supply chain. 
 

Duty to endeavour 

"Duty to endeavour" refers to an organisation's obligation or responsibility to make reasonable and diligent efforts to achieve specific goals or objectives within their supply chain operations. It emphasises proactive improvement, innovation, problem resolution, collaboration, and response.  It requires persistence, adaptability, and flexibility in the face of uncertainty and challenges.  

For instance, companies are not required to ensure that no human rights or environmental obligations are violated in their supply chains. Rather, they must be able to demonstrate that they have made efforts to detect and remove risks, that grievance mechanisms are in place, and that appropriate remedial action is performed. 
 

Duty of care 

The term "duty of care" refers to an organisation's responsibility to take reasonable measures to ensure the safety, well-being, and proper handling of goods and materials throughout the supply chain process. It involves evaluating and mitigating potential risks and negative impacts on individuals, communities, and the environment. 

According to the Supply Chain Due Diligence Act, a company's due diligence requirements pertain to its own business area, the acts of a contractual partner, and the conduct of other (indirect) suppliers. Thus, a company's responsibility no longer ends at its own factory gate but extends along the entire supply chain. The Supply Chain Due Diligence Act defines the protected legal positions as human and labour rights, social rights, a prohibition on discrimination, and environmental obligations.

"Immediate and appropriate preventive measures" refers to actions taken to prevent or minimise the risk of harm or damage that could occur in the near future. These measures are typically taken in response to an identified risk or potential threat, and they are intended to address the risk before it becomes an actual problem.  

In the context of supply chain management, an example of "immediate and appropriate preventive measures" might involve identifying potential disruptions in the supply chain and taking steps to mitigate those risks before they can cause problems.  

For instance, if a company relies heavily on a single supplier for a critical component, an immediate and appropriate preventive measure could be to identify alternative suppliers and establish relationships with them as backup options. This way, if the primary supplier experiences a disruption (such as a natural disaster, bankruptcy, or quality issue), the company can quickly switch to a backup supplier and continue operations without significant delay or loss of revenue.  

Other examples can be suppliers who enter into proactive commitment agreements, unannounced random on-site visits, or joint training of supplier employees on money laundering, corruption, or occupational safety. We derive appropriate, practical, and effective actions from the identified risks and the local environment.  

In conclusion, if there is a risk, there is a need for preventive measures. If there is a realisation of a risk, there is a need for remedial action. The definition of the risk determines whether preventative measures are adequate or whether additional remedial actions are required.

The German Supply Chain Due Diligence Act (LkSG) defines protected legal positions with reference to the human rights conventions listed in the Act's Annex and three selected environmental agreements. Eleven internationally recognised human rights conventions are exhaustively listed in the LkSG. The legal rights protected therein are used to derive behavioural standards for business behaviour in order to prevent the violation of protected legal positions.

The Act contains an exhaustive list of protected human rights-related and environment-related legal positions.

The human rights-related provisions include ones related to: -

1. Various forms of child labour 
2. Forced labour 
3. Slavery 
4. Occupational health and safety obligations 
5. Freedom of association 
6. Unequal treatment in employment 
7. The withholding of an adequate living wage 
8. The disregard of the right to form trade unions or employee representation bodies 
9. Negative impacts on the environment affecting persons 
10. The denial of access to food and water 
11. Unequal treatment on the grounds of national, social, or ethnic origin, disability, sexual orientation, age, gender, political opinion, religion or belief 
12. Unlawful eviction 
13. The hiring of security forces for the protection of a company’s project where this leads to certain human rights violations due to a failure by the company to supervise or control the security forces. 

The environmental protections under the Act prohibit causing harmful impacts on the soil, water pollution, air pollution, harmful noise emissions, and excessive water consumption if they are likely to have a negative impact on natural resources on which people rely, deny people access to safe drinking water, impede or destroy access to sanitation, or have an impact on human health. In addition, businesses are prohibited from using mercury and persistent organic pollutants (PoPs), as well as from exporting and importing hazardous waste and handling such waste.

The introduction of the Act will benefit people in poor countries in particular. For example, roughly 75 million children globally are currently affected by child labour. However, people along the supply chain, in businesses, and consumers can all benefit from the LkSG.

Investigation is a process of gathering and analyzing evidence to determine the facts surrounding a particular incident or event. It can be used to determine if a breach is imminent or has already occurred. Through investigation, organizations can identify potential threats and take action to mitigate them before they become an issue. 

In this article, we shall discuss the concepts of actual indications, sufficient probability, substantiated knowledge, and imminent breach. 

Actual Indications 

Actual indications are signs and pieces of evidence that can be used to support or refute a hypothesis in an investigation.  The fundamental prerequisite of the so-called initial suspicion is factual evidence. Initial suspicion is the core concept in an investigation procedure. Initial suspicion must be based on concrete evidence that suggests a violation of a legally protected position may have happened.  They provide tangible proof of what happened, or didn't happen, and are important for uncovering the truth behind a case. Actual indications can come in many forms such as physical evidence, witness testimony, documents or records, and other forensic data. By carefully examining these actual indications, investigators can build a stronger case against suspects and bring justice to victims. 

Sufficient probability 

The phrase "sufficient probability" refers to the likelihood of a violation or breach.  It is a legal concept that describes the degree of certainty required to prove that someone has committed a violation. In order to establish sufficient probability, it must be proven beyond a reasonable doubt that the accused person or organization was responsible for the violation in question. This means that there must be enough evidence to support the claim, and any doubts about the alleged offense must be eliminated.  There is no definitive definition that can be applied uniformly to all situations. The only certainty is that absolute certainty of a violation of a legally protected position is not required. 

Substantiated knowledge 

If a company has substantiated knowledge of human rights or environmental obligations at its suppliers, it must conduct a risk analysis, implement appropriate preventive measures, develop and implement a scheduled concept for prevention, cessation, or minimization, and, if necessary, revise its human rights strategy policy statement. When a corporation has substantial and verifiable evidence regarding violations at one or more suppliers, it has "substantiated knowledge." By having substantiated knowledge of these obligations, organisations can ensure that they are meeting their legal requirements and protecting both people and the environment. 

Examples: 

• Complaint procedure (mandatory) 
• Personal observations, preventive inspections or audits (10%), and data from authorities (e.g., customs, BAFA) 
• Through other public information sources (Internet, TV) 

Imminent breach 

Imminent breach is a concept used to describe a situation where there is sufficient probability that an organization or individual will suffer a breach. It is based on the substantiated knowledge that the organization or individual has actual indications of an imminent breach.  Organizations must take preventive measures and take remedial action when they have sufficient knowledge of an imminent breach.  Internally inside the company, the following must be determined: 

• If there is risk, take preventive measures. 
• If there is realisation of a risk, take remedial action. 

The aim of these measures is to reduce the risk of a breach occurring and mitigate any damage if it does happen. 

A supplier is a party in the supply chain who makes goods or services accessible to businesses or customers. Suppliers can be both manufacturers and retailers of finished goods, or service providers. The suppliers are at the top of the supply chain. Without them, the entire network would cease to function and collapse. No suppliers means no raw materials or services for manufacturers, and thus, no products for consumers. 

A good example is the COVID-19 epidemic, in which a disruption in the supply chain caused suppliers to be unable to meet demand. Suppliers were forced to cease (or drastically reduce) operations, with consequences felt throughout the supply chain and ultimately reaching the consumer. 

There are different types of suppliers: - 

Direct suppliers

You have placed or accepted an order, and there's a contract in place: the contracting party is your (or you are) the "direct" supplier. 

Indirect suppliers 

The suppliers to your contracting party are your "indirect" suppliers. 

Tier 1 to NN 

The phrase "Tier 1 to NN" refers to both direct and indirect suppliers. Tier 1 is the direct supplier, and Tier 2 and beyond are the suppliers of your suppliers. For example, one of your direct suppliers can be both Tier 1 and Tier 2 for you if they also provide services to one of your Tier 1 suppliers. 

Necessary suppliers 

All suppliers who are directly involved in the production of your product or the delivery of your service and form a part of the supply chain. 

Suppliers of auxiliary and non-essential operating materials 

Suppliers who are NOT part of the supply chain because they have no direct link to the product or service delivered. 

By separating the supply chain into upstream and downstream segments, organisations simplify their management to understand which suppliers are involved until the product “is ready”, (upstream), and which suppliers are involved to distribute it to the customer (downstream). A supplier can be involved in both, the upstream and downstream segments. 

Upstream 

The activities related to a company's suppliers, or the people who give the manufacturer raw materials, are all part of the upstream supply chain. 

Downstream 

The downstream supply chain includes things that happen after the product is made, like getting it to the final consumer. 

The new Supply Chain Due Diligence Act in Germany seeks to enforce stricter regulatory rules and due diligence requirements on businesses.  With the passing of this Act, German businesses will be required by law to make sure their entire supply chain is in line with human rights and environmental standards. 

Human rights violations in global supply chains have been an issue for a very long time.  Due diligence on the entire supply chain enables a business to analyse and mitigate the risk of human rights violations such as human trafficking, forced labour, and child labour. 

Human rights are rights to which all individuals are entitled. They apply to all human beings, simply because they are human beings, wherever and at all times, "without discrimination of any type, such as race or ethnic origin, colour, gender, language, religion, political or other viewpoint, national or social origin, property, birth, or other status" (Universal Declaration of Human Rights, Article 2). The concept that all humans possess the same human dignity and have equal rights is the foundation of human rights. The law is based on the standards set out in the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises. 

Due diligence on the entire supply chain enables a business to analyse and mitigate the risk of human rights violations.  Victims of violations of human rights along the supply chain can sue companies for damages in German courts.  In general, however, the law of the country where the damage occurred applies. The affected parties may also authorise NGOs and labour unions to file legal claims on their behalf directly with German courts, thereby reducing some barriers to access to justice.

On June 11, 2021, the German Federal Parliament passed the Supply Chain Due Diligence Act, also known as the Lieferkettensorgfaltspflichtengesetz or LkSG, and it went into effect on January 1, 2023.

Legally, the LkSG legislation requires companies to modify and update their compliance, purchasing, and contracting processes on particular human rights and environmental issues, including the establishment of a reporting mechanism (called a "complaints procedure") open to relevant stakeholders. Among these changes is the significant introduction of whistleblowing services.

That means that the LkSG Act requires organisations to expand their whistleblowing procedures to natural persons around the world who have obtained information about violations and passed it along to internal or external reporting bodies (whistleblowing persons). This comprises employees, public servants, self-employed persons, partners, interns, volunteers, suppliers' and customers' employees, and interest groups.

German law prohibits reprisals or retaliation against whistle-blowers.

Important aspects of the complaints procedure:

• Publicly available in text format (website)
• Communication with their business partners (and their employees)
• Available in a minimum of two languages (German, English)
• Guarantee confidentiality (anonymity, communication channels, data protection)
• Organized process flow (confirmation of receipt, deadlines for processing, regular reports, documentation)
• Responsible persons (impartial, not bound by instructions, duty of confidentiality, ideally external)

With the complaints mechanism in place, the organisation may demonstrate that it is complying with the respective due diligence obligation imposed by the new LkSG law. In Europe, this is also anchored within the EU Whistleblowing Directive, and soon in the specific Whistleblowing-Protection-Act (Hinweisgeberschutzgesetz) in Germany.

"Policy statement on the human rights strategy" refers to a formal document or statement issued by an organisation that outlines its commitment to respecting and promoting human rights in its supply chain activities.

This policy statement outlines how the organisation intends to address and mitigate potential human rights risks and impacts associated with its supply chain. It demonstrates the organisation's dedication to upholding widely recognised human rights principles and ensuring that its business activities do not contribute to or perpetuate human rights violations.

The purpose of these policy statements is to ensure that companies are aware of and accountable for human rights risks in their supply chains. Among others, they frequently address topics like child labour, forced labour, discrimination, and freedom of association. By implementing these policies, businesses can help that their supply chains are possibly free of human rights violations and are contributing to the promotion of ethical and sustainable business practises.

A policy statement on the human rights strategy may include the following:

1. Commitment to human rights
2. Scope and applicability
3. Human rights due diligence
4. Supplier expectations
5. Grievances mechanisms
6. Training
7. Monitoring and reporting

The policy statement is an essential guide for corporate action and employee behaviour. It describes what a company and its employees stand for, the goals they pursue collectively, and the governing principles they adhere to in order to achieve these objectives.