Guidelines from BAFA on Supply Chain Due Diligence Act (LkSG) for SMEs

September 1, 2023

While the Supply Chain Due Diligence Act (LkSG) officially applies only to companies with more than 1,000 employees, smaller companies are also affected due to their connections in supply chains. The Federal Office for Economic Affairs and Export Control (BAFA) has released guidance on the exact obligations for SMEs in collaboration with affected companies on June 29, 2023.

Affected companies under the LkSG are obligated to exercise human rights and environmental due diligence. This involves not only assessing their own actions but also those of their direct and indirect suppliers.

Their obligations include:

Establishing a risk management system
Conducting regular risk analyses within their own business and among their suppliers
Implementing preventive measures towards direct suppliers
Enforcing due diligence measures concerning risks with indirect suppliers

To assist companies in fulfilling these obligations, the Federal Office for Economic Affairs and Export Control has published various guidelines specifying the extent and requirements of these duties.

Obligations for SMEs

The LkSG currently covers all companies with at least 3,000 employees in Germany. From January 1, 2024, companies with at least 1,000 employees in Germany will also be affected and must fulfill the legal obligations.

SMEs themselves are not directly covered by the LkSG but may still come into contact with the law as suppliers. SMEs are defined as companies with up to 249 employees and an annual turnover of up to 50 million euros. They include micro-enterprises, small enterprises, and medium-sized enterprises.

As obligated companies are required to implement due diligence not only within their own business but also with their direct and indirect suppliers, SMEs are often asked to collaborate by obligated companies. This collaboration is typically formalized through contracts due to the legal obligations of the companies and the potential penalties for non-compliance.

Limits of Obligations

When SMEs enter into agreements to collaborate with companies, they should always ensure not to commit to compliance with LkSG regulations but rather to assistance. They can contribute to meeting due diligence requirements in various ways and be involved. However, there are limits to their obligation to collaborate that do not need to be exceeded.

Points of Contact	Limits
Companies can request information (e.g., about identified risks or violations).	SMEs are not required to conduct their own risk analysis for their supply chain.
Companies may need to implement preventive measures with SMEs.	SMEs are not obligated to maintain their own prevention and remediation measures.
Companies can request assistance from SMEs in case of violations for remedy.	SMEs are not required to submit their own report to the Federal Office for Economic Affairs and Export Control (BAFA) or contribute to the company's report.
Companies can ask SMEs for assistance in providing access to complaint procedures for potential users (e.g., employees, residents).	SMEs are not obligated to establish their own complaint procedure (outside of the system already required by the Supply Chain Act)

Conclusion

Collaboration within the supply chain can be advantageous for both affected companies and SMEs. SMEs can benefit from early risk detection and assistance with prevention measures. Additionally, SMEs should be prepared to provide evidence and information regarding the compliance with human rights in their operations.

While SMEs are not expected to be directly affected by the planned EU Supply Chain Due Diligence Directive (CSDDD), they may be impacted as suppliers. The proposed regulations of the EU Supply Chain Due Diligence Directive are, however, more extensive and will also increase requirements for verifying indirect suppliers. Given the overall political trend towards a more sustainable supply chain (as evident in the EU Deforestation Regulation, CSRD, CSDDD), it is advisable for SMEs to establish organizational and informational processes.