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How Germany’s Due Diligence Legislation Will Impact the Rest of the EU · Speaking of Supply Chain

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You're listening to Speaking of Supply Chain, a Mebach podcast. This is a
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show for logistics professionals looking to learn more about the latest innovations in supply chain.
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Each episode will feature a conversation on topics such as mitigating supply chain disruption
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and reducing risk, current automation trends, sustainability initiatives, and more. Let's
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dive right in. Hello, and welcome to Speaking of Supply Chain, where
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we explore trends, current events, and innovations impacting the logistics and supply chain
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industries. I'm your host, Ellen Wood. I am joined today by Anastasia
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A. Meltchuck. I pronounced that wrong. I'm sure I did. You
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can try perfect. You're joining us today to talk about the Due Diligence Act
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that has just come into law in Germany and is affecting a lot of companies
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in the German area. And so we're going to talk about that in a
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few minutes and what that means in terms of the upcoming legislation next year for
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the entire EU. So Germany is kind of our beta test. It's it's
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our test example to see what's going on. So tell us a little bit
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more about the study and the law itself. Yeah, definitely, Germany is
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a great test run, so to say, for the European Union, especially
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that we know that the European legislation is planned to be even stricter than the
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German one. So even though we have already some resistance in Germany and it
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doesn't seem as easy as it sounds, we know that when the European legislation
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comes, it's going to be even more difficult for business to comply with it.
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So what we did in our study, we basically decided to ask our
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customers, who are partially those large companies that are the fall under the law
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and partially smaller companies. We wanted to ask them are they prepared for the
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legislation, how do they see it, what are they expecting and so on,
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And we definitely got sometimes very surprising the results, not exactly what we
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expected. So it was very interesting, all right. So, what are
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some of the aspects of the legislation that are like the big pieces, the
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more important aspects or the more important regulations that the companies are afraid of or
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worried about. I mean, obviously you know something has to change, So
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there are issues of sustainability, there's issues of human rights and you know,
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other areas of governance and civil issues that companies need to make sure that they're
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adhering to. What are some of the big ones. So when we talk
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about sustainability, I think I would start there a lot of times, especially
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in Europe, the first key word that people would come up as it's like
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set and the environmental sustainability and their emissions and the emissions and the emissions whever.
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It's very it's like a small important but small part of sustainability, right,
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so we don't have to forget that. The legislation is kind of based
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on the fact that there are three peelers of sustainability, the social, environmental,
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and economic one. And there is the greatest difference with the German legislation
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and the European one that German one only focuses on the social sustainability, so
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as you said, it's child labor, human rights, working conditions, fair
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pay and so on so on. So this is the main focus of the
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German legislation. And there are a few clauses that touch environmental problem environmental problems,
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but they are rather side effects, so to say, whereas the European
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legislation tries to tackle the environmental problem directly, and they have a clause for
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large companies to report about how they are planning to reduce their CEO two emissions
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to zero by twenty fifty according to the Paris Agreements. So these are the
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two main differences. However, the base of both legislation is the same.
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It's asking companies to implement a risk management system to tackle those social or social
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and environmental problems. So this includes, yeah, the risk management system itself,
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having responsible persons conducting regular risk analysis, implementing procedures for whistleblowers and so
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on, So having that system in company in place. So a lot of
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what companies are concerned about or in fear of, is the fact that this
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risk management preparation, for lack of a better word, just being prepared for
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it is going to require extra effort. An effort has a cost. It's
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going to require extra personnel or extra time, or extra software or something that
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they're going to have to do that they're not doing today. So what are
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some of the what are some of the feedback that you got from the survey
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itself, or even further, how was this survey conducted like did you just
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go out and start asking people? Did was it an online survey? How
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did you gather all of this data? There was an online survey, so
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we targeted our clients, but we also had it open on LinkedIn and our
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other social networks, so anyone could fill it out. And we had more
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than three hundred responses I think overall, so that it was really good and
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most I think about I think more than eighty percent completed it till m and
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its entirely yeah, exactly, So that was we had great response and we
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had a lot of data to work with, which was really good, and
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we yes and did We had a few questions in the beginning of the questionnaire,
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like what are your expectations towards the legislation, do you think it will
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have positive or negative impact? What do you think will be your biggest challenge?
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And indeed most most of respondents told us that they think that their biggest
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challenge will be bureaucracy and the additional costs and effort that's related to it,
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which is understandable. On the other hand, what we have noticed is during
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the interviews and during the questionnaire that not everyone realized completely what the legislation is
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about, and they had certain expectations, like you know, you talk,
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oh, it's sustainability to legislation, and then without thinking about it more in
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detail, they thought, oh, it means immediately coo two, or oh
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it means immediately I have to quit all of my suppliers in China or I
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don't know now, so they didn't realize. Some cases, we notice that
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that not everyone understood completely what the law means. And of course this m
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not having a clear picture can lead to the fact that there are fears regarding
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the additional cost or administration, even though we have seen a few studies that
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actually said that the cost for the companies will not be as high as many
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expect and there is nothing to fear about it. And the other thing is
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like, the legislation requires you to implement a risk management system, and it's
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a good thing. It's something that we encourage our clients to do exactly.
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So I know we've we've talked on the podcast on other episodes about risk management
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and how companies are trying to prepare for that, because most companies do want
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to head off risks before their hit with a SUP prize or another pandemic or
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another you know, containership caught in a canal. They want to be able
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to adapt to what's happening that they have no control over. And this is
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something where they do have some control over what's going on. And I feel
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like a lot of companies were automatically, as you said, automatically going to
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the worst case scenario, automatically thinking of the most interruption that they or the
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highest interruption that could possibly happen, and a worst case scenario they were they
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were just afraid of it and didn't actually understand what was being asked of them
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at that moment. Yes, we do want to get to a point where
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you know, people are not using child labor, or people cannot get a
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job that earns you know, a living wage. We do want that for
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everyone. But it's not from zero all the way to that answer. It's
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how we how do we stare step and get there one little bit at a
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time. Yeah, exactly. And I think this is an important point because
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I think when seeing some of the resistance that we saw in the questionnaire and
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during the interviews, it feels like some companies do not realize this is only
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the first step, So the only way forward for us to tackle all those
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environmental and general sustainability problems that we've got, we have to make that legislation
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more and more strict, and we have to go further and further. Right
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So this if you look at the general problem of the social inequality or climate
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change, this legislation is kind of drop in an ocean. So it's only
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the beginning. And I think the companies, I don't want to say to
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have to put up with it because maybe it's negative, but they have to
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change their awareness and change their perspective here because there will be there should be
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more legislation like that, and this is the first step to it. So
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right now they're asked to implement risk management system. But we know, for
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example that the European Union they're already discussions about having much more strict environmental legislations.
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For example, in the fashion industry, control and what kind of fabric
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is used in the garment? Is it polyester, is it cotton? Can
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you which fabrics can you combine so that they are more recyclable and so on?
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So this is a lot stricter already than just implementing risk management system.
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So this is great that we've got this legislation now and it is a very
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important step, but there is more to come and companies will have to deal
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with it well. And it seemed to me that a lot of it was
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not just that they needed to implement, but they need to understand where they
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are today. So a lot of these metrics that they're being asked to measure
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or reduce or report on are things that they had never considered previously or not
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considered of importance that they needed to track, whereas this particular legislation brings to
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light that, no, this is an important fact, This is an important
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issue that we need to track and understand what your impact is as a company,
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as a producer or as even just a company who moves items from point
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A to point B. That you have an impact on that overall issue,
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and you need to understand what that is so that if there is a call
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or if there is a need for you to reduce your impact, you know
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where you stand. Yes, definitely, And it's really pushing business to look
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into these topics. For example, a lot of talks in Germany before the
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regulation has come into force, where like all businesses doing so much already,
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we are already so aware of sustainability. We don't need extra administrational effort to
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do it. But then when we did our study, we saw that the
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companies that have recently implemented the sustainability strategy for them, the main factor to
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do so was actually regulation. And I think it was like about forty four
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percent of companies that just recently implemented sustainability initiatives or strategy did it because of
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the regulation, So it's almost half. So we need the regulation to push
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companies to do it, even though it seems like everyone is doing it already,
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not really, we really need We need governments to promote it, to
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step in and have some oversight so that we can establish what the overall situation
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is across multiple companies. Because a company can say, well, yeah,
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I'm sustainable, I'm taking care of these issues internally. We do have ways
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to track and mitigate these these concerns, but not every company does. And
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for each company to say I move the needle this far, or I've saved
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you know this much in my carbon emissions, those add up for every company
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that is participating or working in that you know that environment. So we need
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to make sure that there is some sort of oversight into what is happening as
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a whole, as a as a full industry. And speaking of industries,
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are certain industries more concerned about this than others? You mentioned the fashion industry,
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and I know I've read articles about, you know, some of the
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fashion brands and some of the sustainability issues that they're facing, especially when they
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want to protect their brand and not let you know, items go unsold,
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so they're destroyed, and this is this is a huge sustainability issue. So
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are some industries more concerned than others? Definitely? In fact, the European
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Sustainability Due Diligence Act even recognize as certain industries as high impact or high risk
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industries for example, fashion, agriculture, minerals and so on, where definitely
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the situation is different in different industries. For example, if we talk about
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fashion, it's not tories because of the volume of the product that is produced
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and sold annually, of the volume of waste because of the way the products
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are produced. There's so much need for toxical chemicals that are being released into
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environment because of the social issues. Right, so there's like it covers all
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of the sustainability topics when we talk about fashion and so of course for those
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companies it will be more difficult also because fashion supply chains are usually really large,
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really long, if I can say it so, because each step of
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the production can be done by a different company that maybe you as a brand
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don't even know all of your final suppliers and everyone who has taken who have
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participated in producing your product. One of the worst products to produce is denim,
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right, So you've got company that produces cotton, that sources cotton,
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then you've got someone who is processing the cotton into fabrics, then someone who
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is dyeing it, than someone who is making it into fabric, and someone
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who is actually you know so in the products themselves, and then only only
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like ten companies later it comes to the customer. So this is difficult part
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for those industries with very long supply chains too well, and convoluted supply chains.
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Because you mentioned Denham, but that's only one part of a pair of
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genes. You've also got the zipper. You've also got the little leather tag
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on the back, or you've you've got the little snaps or something else,
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you know, the decorative application and all the things that can go into that
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pair of genes. That someone's going to purchase at a store, and so
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all this intricate web of all of the supplies coming together that's going to affect
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the way. You know, the fashion brand that is being affected has to
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look at all of those inputs that are coming into their supply chain exactly.
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So for such a company, it's a lot more of a challenge than let's
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say you are a local producer of tomato sauce and you locally use all of
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source all of your tomatoes, salt and sugar, source packaging from the same
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suppliers you've been working with for the past twenty years. You own your production,
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produce everything, distribute yourself. You've got your own distribution network, then
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you can track it a lot better than a company, as like we describe
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the fashion industry, and there is also there are also industries that have been
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always highly regulated, for example pharma. Like pharma supply chains are also can
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be also quite long, and there are also a lot of outsourced production.
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But because they have always been so regulated, they already have a lot more
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connection to their suppliers and for them that extra administrational effort does not seem that
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much of a challenge. It's such a small left to take the data that
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you already have, that you've already been collecting over all this time, and
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give it you give it over or produce a report to show what you're doing,
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as opposed to having to start from scratch and all of a sudden look
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at these things that you've never looked at before. Yes, exactly, all
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right, So what about companies that are not large enough? So one of
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the aspects of this legislation is that it's mainly looking at companies of a certain
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size, So smaller companies have smaller regulations or less compliance issues to be concerned
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with. So what about those smaller companies? Are are we just discounting them?
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Are they coming later? What does that look like? Definitely, both
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German and European government is looking into how to incorporate smaller business into legislation too,
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without having too much pressure on them. However, in our study,
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we have noticed already that small companies that do not directly fall under the law,
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they are preparing themselves just as much as the large companies, so they're
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also developing an action plan. They also worried they have the same challenges facing
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them, which was very surprising because really there was almost no difference in the
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replies for large and small companies in our study. And the interesting thing is
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that small companies right now, who also have their expectations and a bit concerns
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about the legislation, they are worried that large companies will be pushing the responsibility
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upstream, especially if we're talking about a small supplier whose only customer or ninety
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percent of orders is done by a large company that have a lot of market
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power, and that large company could tell them, yeah, I need from
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you the audits, to certificates, whatsoever I need, and that this responsibility
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will be pushed other so to say, and that all those small companies will
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have to do the work. Ah, so they would bear the brunt of
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all of the effort that needs to be done. So in our example a
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few minutes ago, where we were talking about genes, when the company,
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the genes company, says, you know, I need to have all of
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this data about the zippers that we use for these genes. And there's one
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zipper company that's providing zippers and all they do is supply this one fashion brand.
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So now they're going to be expected to come up with all of that
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data because the larger company needs it. Yeah, so this is definitely the
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worry that the small companies have. However, we know that the legislation does
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not require us just to provide a certificate about your suppliers. We know you
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have to have risk management system in place, so already by that we know
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that most of the work to implement this is this management system and to take
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care of it, to run those risk analysis and so on, most of
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the work will be actually taking place in the big companies. They can't outsource,
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yeah, they can't outsource. They aren't asked. They can't ask someone
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else to run their risk management for them. So that's already good. However,
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when it comes to those audits and proof of sustainability performance and so on,
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we will have to see how that develops and how that works and how
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really how much work the smaller companies will will have to do. And I
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think that's good that we have this German legislation now as a as you said
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in the beginning, a test run for the European legislation. So we don't
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know yet how how that will impact the smaller companies. By what we know
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already that they are just as worried and they are preparing themselves just as much
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and doing basically the same work. The only difference that we saw that smaller
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companies are don't tend that much to seek consultancy services when it comes to this
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legislation, But otherwise they're doing all the same exactly. It's not something they've
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thought of. They're a small enough company that they typically don't have to pull
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in or outsource that expertise. They're able to just handle that in house.
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So the larger companies that are more familiar with the concept of hiring a consultant
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to come in and assist with this type of thing, they're they're preparing in
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that way. So it does that mean that smaller companies will look for more
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outsourced assistance when it comes to that, or are they overly concerned with their
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typical budget and thinking, oh, hiring a consultant to come in is going
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to be outside of our scope or outside of our available options. I think
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the reason here is really more what they are hiring consultancy for. As so
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a lot or the biggest part of consultancy is hired for legal purposes. So
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when you directly have to comply with the law, and when you have to
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fill out all those official forms. That's what you need your legal consultant for.
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So this is something that the smaller companies won't need. On the second
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place was actually supply chain consultancy as the most sick advice. And I also
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think that this is also more of a problem or a or a challenge for
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larger companies that have those very large supply chains. And this is a question
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if if the smaller companies will need that. So I think they would would
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rather tend to go in for consultancy for sustainability consultancy or standardization of processes.
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This is something that they might need in order to provide the evidence of their
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sustainability performance. But I think those they will have, they will try to
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tackle different kind of problems the larger and the small companies with the consultants that
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they hire. Sure sure, so were there any specific comments from some of
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the participants in the study that led you to some of these conclusions? Did
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anyone say something specifically like I'm worried about this because I know you did interviews,
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so it was it was speaking directly with these individuals and not them just
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filling out a survey online. What were what were some of the more personal
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responses that we're concerning or or excited about. Is anyone excited about this legislation?
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Is anyone looking forward to it? Yeah? That's I think this is
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the part that I would like to talk about because we in the in when
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we did the study, it seemed like overwhelming amount of businesses or participants are
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worried about the cost. But in our interviews, we talked to quite a
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few large companies that already identify themselves as sustainable companies, that they have had
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the sustability strategy implemented for years, and the representatives of companies were actually really
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excited about the upcoming legislation or now it's it's yes enforce but they they actually
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were very optimistic about it. First of all, they've been working on those
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topics and they've had those FRESK management system and sustainability strategy for years, so
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they are not that concerned about what it might mean for their business, and
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they have been paying the cost for being sustainable already. And another point is
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that for them now the playing field will become more fair. Because one of
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the companies that we had an interview was kind of surprised for me that they
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were so sustainable because it wasn't their selling point. They weren't marketing themselves that
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we're really really sustainable. They were, they had they have very high quality
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product, but they don't talk about it that much about how sustainable they actually
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are. So they have been paying the cost for many years just to be
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sustainable, and now other companies, their competitors, have to do that too,
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and they have an advantage. So those who have been sustainable already,
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for them, it's a good thing. And I also think we also had
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an interview where we heard that it's great that it's coming in Germany. For
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us it's now a challenge. But when the European legislation starts, which is
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a lot stricter, we already know how to deal with it. We just
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have to adjust it a bit, and we already know what to do about
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it. So it's also an advantage for German companies because they have to start
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it a bit earlier and they will be fit for the European law a lot
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better. Exactly as you said earlier, it's a step, it's a step
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in a process, and you've got so these companies who have already worked to
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enact some of these policies and prepare or just be sustainable because it's the right
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thing to do. So they haven't been they haven't been getting the notoriety from
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it maybe or maybe they have, who knows, but they're already ready for
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this. So it's to have it be a legislation or something that they have
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to report on or fill out a government form. That's just a little bit
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of headache, a little bit of bureaucracy that they have to do. But
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all of the actual work in changing something has already been done. So now
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they're leveling the playing field where the competitors have to do the same thing.
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And ha ha, we've already got it done. This isn't hard for us
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now and then next year. So the EU legislation is supposed to take effect
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in twenty twenty four. We don't know exactly yet because how it works in
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the EU that each individual country gets two years to adjust the legislation to their
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own country and then it must be approved by the European government and only then
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it comes into force. So it might take a few years still until it's
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actually yeah in place, okay, but we know it's coming. We know
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it's only a matter of time. And at some point these these countries are
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going to have to participate. So all of this is building up, and
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Germany is going to be well placed, well positioned to move on to that
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next step because for them it is only a next step. And hopefully other
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countries are going to be doing something similar where they're preparing and making it so
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that it's not all at once, that it can be a transition period of
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moving up into these uh these levels of participation in making sure that their their
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supply chains are more sustainable. So what are some of the other implications of
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that legislation. We know it's going to take years to you know, enact
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that everyone's going to have a say in what that final uh that final legislation
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is going to entail. But what are some differences between that one and the
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German Duelity Act that is in effect now other than scale, Are there additional
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issues that it's going to tackle? Are there additional And again, if it's
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still being ratified, if other countries are still weighing in on what the importance
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is, that may change. But at the moment, what is different between
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the two pieces of legislation other than just the scale of the impacts I think
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two other important differences are first of all, that in the European legislation,
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let's call them the cels or directors have personal responsibility towards the performance sustainable performance
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of the company or towards the implementing of the of the Jugilgien strategy. So
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in Germany you only the only the company as as as institution, right,
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so where as a body, yes, exactly it's responsible. But in European
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Union it can be so that for the large companies, the actual the person,
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the one at the head of the company, is responsible for the implementation
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of the law, which is of course which is a great difference because if
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you're personally responsible for something, there's a lot higher chance that you will make
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sure that that's in place and it's working, you know, especially at that
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level when when these people have a very high stake in their companies. So
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it's important to hold them personally responsible for the company's participation and and what's the
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word I'm looking for for not just their participation, but their success in establishing
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some of these these policies and making sure that they do extend to the entire
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company. And it's not just you know, pencil whipping a form and filling
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it out and saying yeah, yeah, yeah, yeah, yeah, whatever,
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this doesn't affect me personally, so I don't care, you know,
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I'm I might change jobs next year, so it's not going to matter,
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and putting that back into their lap and saying no, no, no,
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no, this affects you now exactly. Yeah. Yeah, that's why I
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think it's a big difference, and it's really important to bring personal responsibility into
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the sustainability matters now to give the more pressure for it. And another important
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difference is actually the responsibility or what happens if you don't comply with the law
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and in whereas in Germany it's there is no criminal responsibility for it, but
30:33
there might be a possibility of financial penalties, but I don't think it's happening
30:37
right now, whereas in your opin Union there is a criminal responsibility for not
30:41
complyiant with the legislation or at least it's plans so right now or proposed so
30:47
right now, and there is a possibility often of a important ban to European
30:55
Union if you do not comply. So so yeah, the level of of
31:00
responsibilities a lot higher. And when we're talking about the European legislation. So
31:06
what would be a worst case scenario? So if a company just does not
31:11
comply, they do not participate in in either the German legislation or in a
31:15
couple of years with the EU legislation, what is a worst case scenario?
31:21
What could a company expect to happen to them if they decide to blow this
31:26
off and ignore it and not do anything. To be honest, I am
31:30
not sure what the correct answer would be for the German Supply Chain Act if
31:34
you just keep getting notices from the government that that's from So I don't know
31:40
how far that can go in Germany. But in European Union you just will
31:45
have to stop your business there. You will not be allowed to practice any
31:48
kind of business in the European Union anymore. That would be significant for a
31:52
lot of global companies to not have that that very very large demographic area to
32:00
have your business participating in. So what do we look for in the remainder
32:05
of this year in terms of what Germany is trying to do, what Germany
32:09
is trying to push its businesses to get ready for in terms of this larger
32:15
scale legislation. What can businesses expect for the next six to nine twelve months.
32:22
Well, for Germany, the next twelve months will be significant because right
32:27
now this year, the legislation applies to the companies who with more than three
32:31
Southern employees. However, starting with twenty twenty four, it will apply to
32:37
companies who more than a thousand employees, so a lot more companies will be
32:43
in scope. And those companies should be learning right now the from those larger
32:52
from those larger firms and hopefully already starting their preparation and already put in their
32:59
risk management system in place and doing all the work because it cannot be done
33:05
in December. They will manage exactly. Take note, medium companies, you
33:09
are on deck next it'll be your turn, and you need to be ready
33:14
for it. All right, So where can our listeners get a copy of
33:20
this information? Is the study available right now? You said that it's it's
33:23
finished, so no longer taking participants in it. But where can they get
33:30
a copy of this? Oh? Now, our website they can. It's
33:35
it's for free. They can request it on our Mibach website and they will
33:37
get it. Okay, wonderful. Now what if someone has specific questions about
33:42
it? Are you the contact person for them to reach out to and ask
33:46
is there someone else who you know who participated in this study? You know
33:52
what what groups were participating. Yes, definitely, I am very happy to
33:57
answer any questions and I'm always there. And also my colleague Thomas Crabs,
34:01
who conducted the study together with me, would also be the right person to
34:08
contact. So I think we to ask would be the right people to answer
34:14
any of your questions. All right, we should probably weren't Thomas that we
34:16
can't put him on. I'll notice that he's going to be answering questions about
34:22
this. Okay, wonderful. Any other last remarks about this this important and
34:29
very very groundbreaking piece of legislation that's going to lead the way into what the
34:35
EU is trying to accomplish in terms of the Paris Accords and all these other
34:39
things that we're trying to do to make our world a better place and a
34:44
better place to do business. Any other last thoughts, Yeah, I think
34:50
we at me back. Generally, we think this is great step towards more
34:55
sustainable business practice and generally being more sustained as a society. And I hope
35:01
that this will we see a lot of resistance so which means it's doing something.
35:06
There is right, there is progress, and I hope that we will
35:13
change our awareness so that the sustainability regulation will be a normal thing. It
35:17
won't be any more groundbreaking to implement new legislation because of sustainability that will be
35:24
in place always because this is something that we need. And I hope that,
35:30
yeah, the next steps are coming soon, all right, all right,
35:35
and I hope I agree. I think that that Mebak does a great
35:38
job of supporting our clients in terms of being ready for these changes, because
35:45
you know, there's so many changes that we cannot be ready for. None
35:47
of us were ready for COVID when it hit, But these are changes that
35:51
we can be ready for, and we can help our clients to prepare for
35:57
this additional information, share this additional level of responsibility, and because we want
36:02
our clients to be responsible, we want to be part of a responsible supply
36:07
chain. So I think it's wonderful that we're doing this. But I also
36:10
look forward to not only the EU regulations, but expanding this into other geographies
36:15
and even if it's not a regulation yet, maybe we can help other companies
36:20
do that because as the companies in the EU have to look down, as
36:24
we were talking earlier, into those very intricate webs of their suppliers and producers.
36:30
It's going to expand beyond the geography of Europe. It's going to expand
36:37
into the US, it's going to expand into Africa and Asia, and all
36:42
of these things are going to affect us at some point. So let's be
36:45
prepared, let's be proactive about it, and let's look at the benefits that
36:49
we can get from it rather than just extra work. Definitely. Yeah,
36:55
all right, well, thank you so so much for joining us today.
37:00
I have loved our conversation and I can't wait to talk again in a year
37:05
or so, or whenever some of these things start to whenever some of these
37:08
changes start to come into effect and actually see results from it. I think
37:14
that'll be a really exciting time and supply chain. Yeah, I'm very looking
37:17
forward to it. Two, and thank you very much Allen for this conversation.
37:21
That was a lot of fun. Well, that brings us to the
37:24
end of this episode. I hope our listeners enjoyed the discussion as much as
37:29
we did. If anyone out there has a suggestion for a topic or would
37:32
like to be a guest on our show. We'd love to hear from you.
37:35
Please reach out to me at podcast at mebak dot com anytime. As
37:38
always, thank you for listening to Speaking of Supply Chain. If you enjoyed
37:42
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