Sustainability in the supply chain

Through the implementation of the Non-Financial Reporting Directive (NFRD) in Germany, legal requirements were created under which certain companies are obliged to make non-financial statements on their measures for environmental protection, employee protection, social commitment, respect for human rights and the fight against corruption and bribery.

Companies' efforts to achieve sustainability are not limited to their own structures, however, but also and especially apply to their relationships with suppliers and contractual partners. In addition, consumers are increasingly expressing an interest in products that have been produced under fair and safe working conditions and with the least possible environmental impact. There are a number of ways in which sustainability standards can become part of the supply chain.

 1. Statutory requirements

The various issues involved in the interest in sustainability, such as corruption, human rights and the environment, are indeed the subject of statutory requirements. In Germany, specific regulations regarding the legal relationship in supply chains are still lacking.

The NFRD implemented in Germany stipulates in Recital 6 that the company must also report on its supply chain and subcontractors, where relevant and appropriate. However, no requirements as to which rights and obligations exist in the supply chain arise from this.

Warranty law of the German Civil Code [Bürgerliches Gesetzbuch, “BGB”] is also of no further help in the implementation of sustainability, since the statutory requirements are linked only to product quality and not to the manufacturing process.

As rules of conduct, the OECD Guidelines for Multinational Enterprises are also valid for companies in Germany; they are exclusively voluntary for companies. Recently, however, political demands for a supply chain law have flared up again, without there being any concrete draft regulations to date.

 2. Contractual possibilities

To ensure sustainable production, however, companies can agree in contracts with suppliers and contractors on provisions regarding compliance with sustainability standards. Such provisions usually become part of the business relationship as a so-called supplier code of conduct. When implementing such a supplier code of conduct, companies should ensure that provisions are not worded as declarations of intent, but as legally binding provisions covering the entire contractual relationship.

A company can independently draw up a supplier code of conduct and make it a part of the contract and/or its own general terms and conditions of delivery. Furthermore, an existing supplier code of conduct can also be used. Most codes of conduct are based on the ten principles of the UN Global Compact.

Using an existing supplier code of conduct has the advantage that the contractual partner might already be familiar with the provisions and does not have to submit to individual rules of conduct vis-à-vis all of its customers. It is also advisable to use supplier codes of conduct that are typical for the industry, as specifications on occupational safety and environmental protection in particular may depend on the individual industry. In the fashion industry, for example, the Confederation of the German Textile and Fashion Industry [Gesamtverband der deutschen Textil- und Modeindustrie e.V] has provided a Code of Conduct (PDF).

As the supply chain usually not only directly exists between two companies, the supplier code of conduct that is used should therefore also be made an integral part of the contracts between the supplier and other contractual partners and thus cover the entire supply chain.

In addition, when agreeing a supplier code of conduct, in addition to specifying the rights and obligations of the contractual partners, care should also be taken to ensure that compliance with the obligations can be enforced. This includes both monitoring options in the form of audits as well as legal consequences in the event of breaches of duty.

The audits should enable the company to carry out (unannounced) inspections at the supplier's premises, by having its employees or commissioned third parties visit the supplier's site, talk to employees and inspect documents such as pay slips, etc. Usually, the deficiencies found during audits are recorded in so-called "corrective action plans", provoking the supplier to remedy the deficiency within a certain period of time.

Moreover, the supplier code of conduct may envisage further escalation stages, such as contractual penalties, the cancellation of individual orders or the termination of the entire business relationship. So-called "score cards" have become established practice for the assessment and internal documentation of suppliers. On such score cards, companies record various parameters, such as the achievement of product quality and the punctuality of deliveries, as well as compliance with the agreed supplier code of conduct. These score cards enable companies to make well-founded decisions about their further cooperation with suppliers.

Should you have individual questions on this topic, please feel free to contact our experts in the Retail and Consumer Goods sector group.

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