Business and Human Rights: Mandatory Human Rights Due Diligence – Germany moves closer to enacting its own law

As outlined in our previous briefing, there is an ongoing international trend towards mandatory human rights due diligence legislation, which is gaining further momentum and support across the globe.

Germany is the most recent jurisdiction to substantiate this rapid transition. At a press conference on 14 July 2020, two Ministers revealed a plan for Germany to enact its own human rights due diligence law (the "Proposed Law"). The key elements of the Proposed Law are likely to be agreed upon shortly and the Proposed Law passed by September 2021 at the latest.

Key takeaways

1. The Proposed Law builds on Germany's 2016 National Action Plan on Business and Human Rights ("NAP")¹, which had advocated for voluntary measures in the area of business and human rights.
2. Notably, the Proposed Law would introduce mandatory human rights due diligence requirements for certain companies. In particular, companies with over 500 employees would need to carry out a human rights risk assessment across supply chains and subsequently employ appropriate mitigation and corrective measures.
3. Penalties and sanctions are contemplated under the Proposed Law.
4. Best-in-class companies are already preparing for the incoming tide of mandatory human rights due diligence legislation, including the Proposed Law.

The catalyst for change

In 2016, the German government approved its NAP in line with the United Nations Guiding Principles on Business and Human Rights ("UNGPs"). Under the NAP, businesses were encouraged to voluntarily disclose information around their human rights supply chain risks, and to take voluntary action to address any adverse impacts. 

Since 2016, two NAP surveys revealed that only a minority of companies were fulfilling the NAP voluntary requirements. The first survey (in 2019) indicated that under 20% of company respondents completely fulfilled the NAP standards. The second survey, which was published on 14 July 2020, showed comparable results, with only 22% of respondents satisfying the NAP criteria and only 50% of the respondents fulfilling the necessary due diligence standards. This apparent failure of a large number of businesses to sufficiently follow the voluntary NAP is a key factor that has triggered Germany's move towards mandatory measures under the Proposed Law.

Requirements under the Proposed Law

The Proposed Law is based on the UNGPs and the OECD Guidelines for Multinational Enterprises. If enacted, the Proposed Law would subject German companies with over 500 employees to certain mandatory legal obligations, such as a requirement to warrant that social and environmental standards are adhered to throughout the supply chain. Companies would need to review whether their business activities either have or possibly have an adverse effect on human rights. They would also have to counter such risks that are associated with their business, products or services as a result of their business relationships. After this human rights risk assessment, companies would need to adopt suitable measures to limit the negative impacts and offer accessible remedies. Under the Proposed Law, certain companies would also be required to report on the steps they have taken in this regard to a federal authority.

Possible sanctions under the Proposed Law

Companies may face civil liability if they fail to comply with the Proposed Law, and victims of human rights abuses may be entitled to commence legal proceedings for damages in the German civil courts. In addition, companies may be subject to administrative fines and be prohibited from public contracts for a specific timeframe.

Limitation of liability and “safe harbour”

Under the Proposed Law, any violation of the requirements would establish civil liability and provide a cause of action. However, if appropriate human rights due diligence has been carried out, then liability would be limited to cases in which the damage was foreseeable and avoidable. The Proposed Law moreover provides for a “safe harbour”, and limits companies’ liability to cases of intent and gross negligence if they implement yet to be determined “recognised (industry) standards” in their due diligence practices.

What can businesses do to prepare?

As mentioned above, there is an increasing global trend towards human rights due diligence legislation . Germany is a key player in  this respect – for example, the German Government declared that one objective of its current Presidency of the Council of European Union is to push for greater protection of human rights in supply chains. As we outlined in our previous briefing, the European Union has committed to introducing its own due diligence law, and so Germany's Presidency will likely reinforce the urgency of introducing such EU-wide legislation.

In addition, the UN recently announced that the Government of Germany  is supporting a UN project to shape transformational change in the area of Business and Human Rights: this will entail undertaking a project to scale up the UNGPs and “leverage wider, more robust policy action and incentives”.²

Investors and consumers are also increasingly focused on the human rights track record of a business, presenting clear financial and reputational risks for businesses. For example, Boohoo, a hugely success fast fashion business, saw 50% of its share value (£1.5 billion) wiped out in just 48 hours amid revelations of modern slavery in its supply chain.

Accordingly, best-in-class companies are already:

1. Closely monitoring legislative developments relating to mandatory human rights and environmental due diligence.
2. Carrying out a human rights impact assessment and taking proportionate counter-measures, as well as communicating internally and externally on what measures have been taken.
3. Reviewing and reinforcing complaints mechanisms and speak-up programmes, and ensuring the business is well equipped to deal with "crises".
4. Reviewing the extent to which their Board is equipped to address supply chain risks, including through training executives and seeking independent support and advice.
5. Reviewing the role, resources and expertise of the legal and compliance functions, who should play a key part in addressing these new challenges.

Mayer Brown specialists are available to help clients in this increasingly complex and evolving environment.