Getting to grips with supply chains
24 SEP 2022
Global supply chains are increasingly in the public eye – not just due to their vulnerability, which was clearly revealed by the Covid-19 pandemic and the war of aggression against Ukraine.
Global supply chains are essential for supplying us with energy and raw materials as well as materials and components for the electronics industry. While supply reliability has recently dominated public discussion due to the Covid-19 pandemic, supply conditions also play a crucial role in topics such as respect for human rights, prevention of child or forced labor and environmental protection along entire supply chains. These aspects are attracting the attention of not only critical consumers, but increasingly also legislators.
On January 1, 2023, the German Supply Chain Due Diligence Act will take effect. This law mandates the human rights due diligence obligations of companies and imposes sanctions for violations. The plans presented by the EU Commission in February provide for an even stricter European supply chain regulation and are viewed rather critically by our industry. We at Merck KGaA, Darmstadt, Germany have long promoted stability and transparency in our supply chains, focusing on compliance with environmental and social standards.
Corporate due diligence in the supply chain – a controversial debate
These days, most companies operate globally. Their supply chains usually consist of a large number of suppliers that form a complex network across national borders.
According to market research institute infratest-dimap, around 75% of the German population is in favor of a legal regulation to protect human rights in supply chains. Consumers are increasingly demanding ecologically sustainable products. Trust in companies and the social and economic conditions under which products are manufactured are thus becoming increasingly crucial success factors. Last but not least, investors and analysts have been taking ESG topics into account in their forecasting models for quite some time, which has a significant impact on investments.
The German Supply Chain Due Diligence Act, which will take effect at the beginning of 2023, mandates companies with offices in Germany to conduct due diligence on their supply chains. Their due diligence obligations apply in principle to the entire supply chain – from the extraction of raw materials to the delivery to the end customer.
Critics of this law fear that it could put German companies at a severe disadvantage in the international competition. They say that monitoring the entire supply chain is particularly difficult for medium-sized companies. Yet large companies are also faced with increased administration and documentation. To meet the requirements of the law, some companies will have to completely change their business processes. Consequently, they may withdraw from certain countries or markets because they cannot bear the risk of violating the law. And this could have disastrous impacts for the respective countries and their populations. If foreign competitors with lower standards fill the gaps that arise as a result of this law, workers in the affected countries will see their economic prospects and the human rights situation deteriorate in the future.
EU supply chain law also within reach
The EU Commission’s proposal to impose civil liability not only for violations by direct suppliers but also, under certain circumstances, for violations by suppliers’ subcontractors is considered particularly problematic. Nevertheless, I generally consider an EU regulation to be desirable because we would then have uniform minimum requirements in the EU at least.
Should legislators or companies be responsible for reviewing supply chains? This question is the subject of heated debate. Personally, I believe that both legislators and companies should take responsibility here. According to the UN Guiding Principles for Business and Human Rights, countries have a duty to protect human rights. For this reason, governments should take responsibility for complying with human rights. Holding companies responsible for government tasks would require a change in legal doctrine, which I consider to be impermissible. Nevertheless, every company must fundamentally ask itself what will happen if social and ecological risks in the supply chain are ignored. The devastating collapse of the Rana Plaza garment factory in Bangladesh in 2013 killed more than 1,000 people. Thanks to initiatives such as the Accord on Fire and Building Safety in Bangladesh and the global ACT agreement on living wages in the garment, textile and footwear industries, health and safety standards as well as working conditions have improved slightly there, at least in these sectors. However, if higher standards are implemented only in individual countries or sectors, then the risks will still remain, albeit in other places.
Creating legally secure and practicable regulations
Like many other companies, we source raw materials, packaging, technical goods, components, and services from around the world. We therefore believe that using internationally comparable standards and binding rules to protect people and the environment is fundamentally the right thing to do. As a global science and technology company, we aim to create sustainable value while harmonizing ecological, social and health aspects. As one of the companies to sign the Responsible Care Global Charter of the International Council of Chemical Associations (ICCA) and the United Nations' Global Compact, we fully recognize our responsibility for the environment while protecting the safety and health of our people, customers, contractors, and visitors.
Many other companies are also aware of the need for sustainability in the supply chain. Ideally, however, not only individual companies but entire industries should join forces to develop joint solutions and concepts for legally secure and practicable regulations. A good example of industry-specific solutions is Chemie3, the sustainability initiative of the German chemical industry.
Here, the German Federation of Chemical Employers (BAVC), the German Chemical Industry Association (VCI) and the German Mining, Chemical and Energy Industrial Union (IGBCE) are working together to anchor sustainability as a guiding principle in the chemical and pharmaceutical industries. Chemie3 is developing an industry standard for sustainable value chains that offers a variety of approaches for more sustainable management of our supply chains. I firmly believe that precisely these kinds of collaborations and joint initiatives are needed to enable practical, industry-specific solutions.