Effective and appropriate HRDD requires a shared responsibility approach, responsible contracting & purchasing
About the authors:
Michaela Streibelt is a German lawyer, lecturer and advisor in business and human rights. She advises German companies on implementing human rights and environmental due diligence and works as European Legal Advisor for the Responsible Contracting Project.
Daniel Schönfelder is a lawyer and lecturer in BHR. He works as a European Legal Advisor for the Responsible Contracting Project and in-house on the implementation of the German Supply Chain Due Diligence Act.
The new joint BAFA- & Helpdesk-Guidance on Collaboration in Supply Chains outlines how companies in scope of the German Supply Chain Due Diligence Act have to collaborate with their suppliers in order to conduct effective and appropriate due diligence according to the German Supply Chain Due Diligence Act. This has implications beyond Germany, as similar requirements can be derived from HREDD instruments like the UNGP, the OECD Guidelines and related guidance, the CSDDD and other mHREDD instruments. The tools and approaches of the Responsible Contracting Project, as well as the the ABA MCC 2.0, the recently published Supplier Model Contract Clauses (SMCs 1.0) for the apparel and textile sector, and the EMC project will help companies meet the expectations.
The German Supply Chain Due Diligence Act (GSCDDA) and the Helpdesk & BAFA Guidance show that HREDD is a shared responsibility
The GSCDDA requires German companies of a certain size (with 3,000 employees in 2023 and 1,000 employees in 2024) to conduct Human Rights and Environment Due Diligence (HREDD). The Federal Office for Economic Affairs and Export Control (BAFA) is the competent authority to supervise if they meet the requirements. For this purpose, it can issue clarifying guidance, which it has done on several aspects of due diligence. Most recently, the BAFA together with the Helpdesk on Business & Human Rights the German Federal Government’s support program for businesses and business associations (Helpdesk), published a guidance on the crucial topic of collaboration in the supply chain.
Since the German Act requires companies in scope to conduct due diligence not only in relation to their own operations but also in relation to their supply chains, they need to collaborate with their suppliers. In the past, many companies have implemented abusive, risk-shifting practices that were not effective to respect human rights and the environment but instead created an environment in which suppliers were left alone with meeting standards and implementing due diligence processes and had to fear for losing their buyers when they learned of problems. This practice has rightly been criticised as ineffective to protect human rights and the environment (see, for example, here, here or here). The BAFA and the Helpdesk have now joined this critique: in their guidance, they state that the Act’s obligations cannot be transferred in the supply chain since such a transfer typically does not meet the Act’s requirements of effective and appropriate action (Sec. 3 (2) and 4 (2) GSCDDA)).
Shared responsibility requires appropriate cost and burden-sharing
In their first joint publication the two institutions lay out in detail the German Act’s requirements in relation to the individual due diligence obligations that require different actors to collaborate in the supply chain: risk analysis, preventive and remedial measures, and complaints procedures (Sec. 5-8 GSCDDA). Generally, companies in scope must consider their supplier’s capacity and legitimate interests when involving them in the fulfilment of their own due diligence obligations. The German legislator’s fundamental decision to only oblige German companies of a certain size must be respected. This means that costs and efforts for measures that serve fulfilling the own legal obligations of the companies subjected to the law must generally be borne by such companies. The criteria of appropriateness require companies to tailor their support according to the supplier’s capacity. Not all suppliers need support, as many are themselves powerful companies sometimes with more market power than buyers. In general, upholding human rights and environmental aspects raises costs also for suppliers. Companies in scope have to reflect this when setting their prices, for example, by selecting not only by weighing price and quality but also sustainability performance (Sec. 6 (3) No. 2 GSCDDA). This also has implications for concrete cases where corrective or preventive action is required. For example, if the company discovers that a non-obliged supplier with relevant risks for environmental matters (Sec. 2 (2) No. 9 GSCDDA) does not have an environmental management system, it might be a sensible preventive measure (Sec. 6 (1) GSCDDA) to require them to introduce such a system. Appropriate cost sharing would mean that the company subjected to the German Act will cover a part of the related costs, according to its share of the order volume and depending on the capacity of the supplier and the degree to which the supplier is fulfilling own legal obligations by introducing the management system.
The role of contracts and purchasing practices
The GSCDDA explicitly requires companies to oblige their suppliers to uphold human rights contractually (Sec. 6 (4) No. 2 GSCDDA). These obligations must comply with the Act’s requirements of effectiveness and appropriateness which requires responsible contracting based on shared responsibility.
Contractual assurances alone are neither a meaningful contribution to the risk analysis nor effective and appropriate preventive measures. However, such assurances play an important role when implementing due diligence processes in collaboration with suppliers, as they communicate the buyer’s expectations and make them enforceable, thus creating important leverage needed for HREDD. Codes of conduct and contract are the most widely used instrument by companies in practice when collaborating with their suppliers. Besides providing for legally enforceable obligations, contracts are an important operational and communicative tool in the business relationship. These instruments, however, only meet the GSCDDA’s requirements when designed in a way that allows for effective and appropriate due diligence. This has several implications: First, the BAFA- and Helpdesk-Guidance takes a clear stance against abusive contractual practices that merely transfer obligations to suppliers and create incentives for suppliers not to openly communicate about problems. That is very reasonable, because, if the only party ever at fault for human rights issues is the supplier, the impact of the buyers’ purchasing practices is unlikely to be addressed although they might cause or contribute to risks (see example here and here). The Guidance therefore rightly requires companies to evaluate if their contract design is based on shared responsibility. Second, the Guidance clearly states that companies also have to analyse the incentives they set with their contracts, specifically with the prices they set, their termination rights and the contract duration. That is very sensible, because with low prices, suppliers will struggle to meet standards like paying living wages. Excessive termination rights set the incentive to hide problems. Only longer contracts incentivize to invest in measures that are expensive or have long-term implications (such as again living wages or upgrades needed for OSH & environmental protection – on these connections, see here). In line with this reasoning, the Guidance also warns companies not to use “no risk” guarantee clauses – these clauses are dangerous since they again require suppliers to lie, since “no risk” situations are very improbable – even in low-risk countries (for example, in Germany the gender pay gap is still far from being closed – this is a human rights risk, see Sec. 2 (2) No. 7 GSCDDA). Thirdly, BAFA explicitly cautions to analyse potential negative impacts created by termination, essentially requiring responsible exit.
In summary, the Guidance takes a clear stance against contracting as usual and risk-shifting practices. Since it clarifies that learning of contractual assurances that transfer obligations in the supply chain might entail controls, it is to be expected that companies in scope will adapt their practices accordingly. At least for German companies subjected to the law, that means an end to traditional risk-shifting contracts and a shift to contract that provide for human-rights-effectiveness. Since human-rights-effectiveness is diametrically opposed to what in the past was understood as successful contract negotiation results by legal practitioners, it is to be expected that their services will shift to responsible contracting as well. Contrary to some interpretations, the Guidance, however, does not require companies to abandon standard supplier codes of conduct (SCoCs) and in favour of individual and risk based SCoCs with every single supplier. These are needed, as operational and informative tools, to create leverage in supply chains and enable effective HREDD. Requiring each SCoC to be tailored to the individual supplier’s situation would be very burdensome and impractical. Instead, the Guidance requires companies to use contractual instruments where they are necessary, taking into account each supplier’s risk situation where contractual obligations prescribe very specific and detailed requirements for the concrete. For example, a general requirement to act in line with environmental law on air, water, noise, soil protection would be possible in a standard SCoC. But a concrete and detailed requirement on how to implement this using specific systems needs to be connected to the suppliers concrete risk situation (for a negative example of a small company receiving overly complex detailed environmental requirements as part of standard requirements, see here).
The Guidance furthermore clearly states that contractual assurances will not be effective when companies in scope do not analyse and address negative impacts created by their own procurement and purchasing practices (Sec. 6 (3) No. 2 GSCDDA, on this, in detail see Guidance, p. 24, Info box 7). Companies in scope are called upon to analyse and adjust prices, lead times, changes to orders, product specifications and lead times, and duration of contractual relationships. Even though it seems obvious that contractual assurances simply are unrealistic in a high-risk context and will not provide for adequate living wages, operational safety and health, and environmental protection (to just name a few) alone when prices are too low for that, explicitly addressing this in the Guidance is necessary: too many companies have tried to define-away their responsibility and due diligence obligations. This is likely to require companies to conduct a risk analysis specifically about the risks their purchasing practices create, prioritize in which sectors those are highest (e.g. purchasing in low wage sectors) and adapt their practices progressively and prioritise on a risk-based approach. Recommendations on how to do this can be found here and here.
Implications for other HREDD requirements under the GSCDDA
The guidance also has implications for other HREDD requirements under the GSCDDA. When requesting information for the risk analysis (Sec. 5 GSCDDA) from their suppliers obliged companies must take into account not only the individual supplier’s capacity but also their legitimate interest not to share certain information and the individual risk situation. Questions that bear no relevance in the specific context are not a meaningful contribution to an effective and appropriate risk analysis. These clear statements by BAFA and Helpdesk will certainly be welcomed by many suppliers who have been receiving a high number of similar but different self-assessment questionnaires or been confronted with requests to share information they prefer not to share for example for fear of being excluded in the supply chain.
In relation to complaints procedures (Sec. 8 GSCDDA), the Guidance requires companies to request information from their suppliers to design the procedure in a way that it is accessible to them. Furthermore, they typically need their supplier’s assistance in order to make the procedure accessible to the target group and protect potential users from disadvantage or punishment. The Guidance explicitly encourages obliged companies to require their suppliers to inform individuals of the fact that the obliged company is among the supplier’s buyers and to effectively protect them from disadvantage or punishment. Since lack of information of who is among a supplier’s buyers is one of the key impediments to accessing operational level grievance mechanisms, this information is a helpful clarification.
Model Clauses based on Responsible Contracting can help to implement these requirements
With the ABA MCC 2.0 and the SMCs, the Responsible Contracting Project provides standard clauses open access that are based on the same principles as the guidance – shared responsibility including responsible purchasing, no requirement of no risk guarantees, cost sharing & responsible exit. In addition, a working group that includes members from BHR academia and practice from France, Germany, Italy, Poland, Spain, Portugal, the UK and Netherlands, is currently developing a new set of model clauses based on these principles and tailored to the legal requirements of these countries and the CSDDD. These clauses are open for consultation until December 15th. These sets of clauses and the principles on which they are based are already being used by several companies, benchmarks and investors (see here) and being recommended by renowned BHR experts. Using them can help companies meet the new requirements and upcoming similar ones under the CSDDD (on this, see here and here)
Suggested citation: M. Streibelt and D. Schönfelder, ‘Effective and appropriate HRDD requires a shared responsibility approach, responsible contracting & purchasing’, Nova Centre on Business, Human Rights and the Environment Blog, 8th November 2023