Inverto MD: German ESG law creates ‘compliance headache’
Firms face fines of up to 2% of their turnover if they do not construct a complete ESG inventory
A new German ESG law which came into force on 1 January of this year will have major consequences for businesses in the UK and across the globe, an industry insider told Net Zero Investor today.
The new rules mean German companies now face fines of up to 2% of their global turnover if they do not construct a complete ESG inventory of their supply chains and take steps to prevent human rights abuses or environmental degradation within them.
German firms that fail to comply with the new law also risk being excluded from German public contracts for up to three years.
Thibault Lecat (above), who is managing director of supply chain management consultancy Inverto in London, explained today that “Germany is going further and faster on ESG than many other countries.”
“UK businesses essentially have no choice but to comply with this law if they want to keep their German customers,” Lecat told Net Zero Investor.
Any UK business which supplies a large German company, in any sector, will have to supply large amounts of detailed ESG data to their German customers in order to keep doing business with them.
In some cases, UK companies will already be complying with similar UK regulations, such as those covered by the Modern Slavery Act.
Many UK suppliers are already likely to have received weighty questionnaires from their German customers, asking questions about ESG issues such as:
• Forced labour
• Child labour
• Violations to freedom of association
• Unethical employment
• Unsafe working conditions
• Environmental degradation
The law also forces German companies with knowledge of human rights or environmental issues further down the supply chain to take remedial action in the same way as for a direct supplier.
This means that UK suppliers are likely to come under pressure to provide extensive information about their own supply chains as well.
Thibault Lecat says: “The law passed in Germany is going to have significant compliance ramifications for businesses in the UK and around the world, which many will simply not be prepared for. German companies will be pushing their suppliers worldwide hard to avoid heavy fines.”
Lecat stressed that “in the UK, most suppliers of German businesses will have been unaware of these new requirements until their German customers started submitting demands for information.”
The law applies to all German companies with more than 3,000 employees - since 1 January of this year - and will be extended to all those with more than 1,000 employees from 1 January 2024.
In addition to the German law, the EU is planning to introduce even stricter legislation, requiring all large EU companies to conduct full ESG audits of their entire global supply chains, including indirect suppliers.
The law will affect EU companies of 500 or more employees and a turnover of €150 million or more and companies will be obliged to take steps to address any human rights abuses or environmental destruction in their supply chains.