LKSG - Glossary of frequently used terms

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.

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.

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. 

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. 

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.

"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.

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.

"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.

"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.

“Occasional review" refers to the periodic assessment or evaluation of particular events or changes to the supply chain to ensure its effectiveness and alignment with the organisation's goals and objectives. To make informed decisions and adjustments, it involves reviewing and analysing the results, performance, and effects of these events or changes. 

Below are such instances where occasional review is required: 

1. The beginning of a new business activity or market: A periodic review would involve evaluating the development, challenges, and outcomes of the new business venture or market entry. This review helps in identifying any operational or strategic adjustments required to improve performance and seize opportunities. 
2. The establishment of a new business partnership: Occasional reviews involve evaluating the performance and alignment of the new business partnership with the organisation's goals. It helps in identifying any problems or areas where the partnership has to be strengthened, such as in terms of collaboration, communication, or reaching set goals. 
3. The launch of a new product: Occasional reviews would evaluate the new product's performance in terms of sales, market response, and consumer feedback. This analysis helps in identifying any potential problem areas or necessary adjustments to improve supply chain procedures, marketing tactics, or product quality. 
4. Changes to business principles or strategies: Occasional reviews will evaluate the success and impact of the changes to business principles or strategies. This evaluation assists in determining whether the adjustments have improved performance, addressed any highlighted challenges, or are in line with the organisation's goals. 
5. Change in ownership structure of business partners: Occasional reviews would involve evaluating the impact of the ownership structure change on the relationship and performance of the supply chain. This analysis helps in determining whether there are any implications on collaboration, decision-making, or communication and whether changes are required to keep a profitable business relationship. 

In general, supply chain occasional reviews involve routine assessments of particular actions or changes to make sure they are successful and in line with organisational objectives. Organisations can use these reviews to gain knowledge, make informed decisions, and change their supply chain strategy and operations as necessary. 

“Imminent realisation of a risk” refers to the point at which a potential risk or threat is about or very likely to occur. It is the moment when a risk that was previously identified and assessed as mere possibility is now becoming a reality and is likely to cause disruption to the supply chain.    

This is a critical time for supply chain risk management, as it requires swift and decisive measures to mitigate the impact of the risk. To be able to respond effectively to an imminent risk, it is important to have a comprehensive understanding of the vulnerabilities and exposures of the supply chain, as well as a robust mitigation framework to protect business operations and ensure the continuity of supply chain processes that plan around the highest priority risks. 

"Probability to certainty in the foreseeable future" refers to the process of moving from a state of uncertainty to a state of certainty regarding a potential risk or event that could impact the supply chain.  This process involves the following stages: 

1. Substantiated knowledge: This refers to the stage where there is awareness about a particular risk or event, but it is not yet clear whether it will actually occur or not.  This awareness is based on observations, reports, or early indicators.  At this stage, it implies a level of uncertainty.  Supply chain managers may need to gather more information to determine the likelihood of the risk or event occurring. 
2. Reasonable probability: This stage involves a higher level of certainty, where there is a reasonable probability that the risk or event will occur.  There is a reasonable probability that the risk will materialise in the foreseeable future.  At this stage, supply chain managers may need to start taking proactive measures to mitigate the impact of the risk or event. 
3. Factual indications: This is the final stage, where there is a high level of certainty that the risk or event will occur.  At this stage, supply chain managers need to take immediate action to mitigate the impact of the risk or event and prevent disruption to the supply chain. 

Overall, the process of moving from probability to certainty in the foreseeable future is an important aspect of supply chain risk management, as it enables supply chain managers to take proactive measures to mitigate the impact of potential risks and events on the supply chain. 

The objectives outlined in the EU Treaties are to be achieved using a range of legislative instruments. Some of these legal acts carry legal force, while others do not.  Some apply to all EU countries, while others apply only to certain countries. 

Regulations 

A regulation is an obligatory legal act that all EU member states must fully implement. For instance, when the EU regulation abolishes roaming fees inside the EU expired in 2022, the Parliament and Council established a new regulation designed to be clearer than the previous one and to ensure a consistent approach to roaming fees for another 10 years. 

Directives 

A directive is a legal act that establishes a requirement for all EU member states. However, individual nations must enact their own legislation to achieve this objective. An example is the EU directive on single-use plastics, which decreases the environmental impact of some plastic products, for instance by regulating or banning the use of disposable plastics such as plates, straws, and cups. 

Decisions 

Decisions are binding and immediately applicable to the intended recipients (for example, an EU country or an individual company). For instance, the Council made a unilateral decision regarding the introduction of the euro in Croatia on January 1, 2023. 

Recommendations 

Recommendations are not enforceable. For instance, the Commission's advice about internal safeguards for editorial independence and media ownership transparency had no legal consequences. In a recommendation, institutions may express their views and propose actions without imposing any legal obligations on people to whom the recommendation is directed. 

Opinions 

In an opinion, institutions may express their views on a subject in a non-binding way. Therefore, it does not impose a legal obligation on its recipients and is not binding. The major EU institutions (Commission, Council, and Parliament) as well as the Committee of the Regions and the European Economic and Social Committee can issue opinions. Throughout the legislative process, committees present their different geographical, economic, and social perspectives. The European Economic and Social Committee, for instance, has produced a report on the Next Generation SME Strategy.  

The Latin word "audire" translates to "listen".  Consequently, an audit involves listening to or, more accurately, examining anything. 

The audit is a procedure in which a so-called auditor, the listener, visits a company and systematically examines and evaluate its procedures and operations as an independent party.

The purpose of an audit is to determine whether specified objectives are reached, standards and guidelines are followed, and instructions are carried out as intended.  An audit is to identify weaknesses, risks, and opportunities for improvement within the supply chain, which can result in reduced operating costs, increased competitive advantages, and overall efficiency.

Audits are a part of a company's quality management. Typically, external auditors are hired to evaluate specific procedures. Additionally, there are internal auditors.  For instance, internal system audits, process audits, project audits, and external certification audits or supplier audits are distinguished.

Companies are typically required to pay for audits. 

There is no audit standard in place for the Supply Chain Due Diligence Act at present. If a company, typically a supplier, is audited, the audit standards are those of the customer or a neutral third party like Trustnet.Trade audit standards.  A supply chain audit is an important tool for supply chain risk management and can help organisations identify and mitigate risks, improve efficiency, and reduce costs.

The self-disclosure questionnaire is a series of questions designed to allow the principal to gather the information specified in the Supply Chain Due Diligence risk analysis. Typically, self-disclosure questionnaires include a general section, an industry-specific section, and a country-specific one. 

A self-disclosure questionnaire is a tool used by companies to assess and evaluate their suppliers' compliance with social, environmental, and ethical standards.  The questionnaire is a self-assessment tool that suppliers complete to disclose information about their practices, policies, and procedures related to various aspects of their operations, such as labour standards, human rights, environmental impact, and conflict minerals. 

The questionnaire is designed to help companies identify potential risks and opportunities for improvement in their supply chain and to ensure that their suppliers are meeting the required standards.  The questionnaire can be customised to meet the specific needs of the company and can be used to evaluate suppliers at different stages of the supply chain.