“Appropriateness” and the LkSG

“Appropriateness” under the LkSG

Since January 1, the German Supply Chain Due Diligence Act (LkSG) has required companies to take responsibility for human rights and environmental standards in their own operations and along their supply chains.

To assist companies in the rather challenging task of understanding and fulfilling their obligations, the German Federal Office for Economic Affairs and Export Control (BAFA) published additional guidelines in January 2023 on how to implement not only meaningful, but also “appropriate” human rights due diligence procedures.

Below, we list some of the questions affected companies have and what the BAFA Guideline reveals in connection with each of those questions.

What does “appropriate” mean in the context of human rights due diligence?

The LkSG requires companies to assess whether their due diligence processes, such as their risk analysis and respective preventive measures, are appropriate. The approach, which is based on the UN Guiding Principles on Business and Human Rights (UNGPs), aims to avoid overburdening companies, by allowing them discretion when it comes to the risks they address, the prioritisation of these risks and the extent to which they address them. In the LkSG, the principle of “appropriateness” (Section 3 (1)) covers the implementation of all steps of the due diligence process, from the allocation of resources to the relevant departments all the way to the remediation of violations.

How is “appropriateness” determined?

The LkSG sets out four criteria for a company to consider when determining whether its actions are appropriate (§3 (2)):

  1. The nature and scope of a company’s activities
  2. The severity, including scope, scale and irremediability, of a risk or violation, as well as its likelihood
  3. The company’s ability to influence the direct perpetrator of a human rights or environmental risk or violation
  4. The nature of a company’s causal contribution to the risk or violation, which is closely linked to the third criterion

What does “appropriate” mean in practice?

One aspect that companies should consider is their own business structure, their position in the supply chain, and the susceptibility of their business to human rights and environmental risks associated with their products, services and business activities in general. Another aspect is the likelihood and potential severity of a risk or violation itself, as this is critical in determining prevention and remediation measures. A company also needs to determine its ability to influence the risk, for example by establishing its proximity to the risk. Finally, companies need to assess the extent to which they have contributed to, or even caused, the risk or violation arising from their business conduct.

This means that a company is obliged to react immediately if, for example, a risk of non-compliance is identified in its own operations that could put its own employees at risk. In such a case, the source of the risk is closely linked to the company’s own operations and the company is likely to be in a good position to influence relevant events at its own sites. Conversely, if a company’s sub-supplier in a distant country registers a possible risk or violation, the company itself is arguably less causally connected to the risk while also having limited ability to influence a sub-supplier’s circumstances.

The guidelines provide examples of questions and considerations for assessing the aspect of “appropriateness”. Companies are required to thoroughly document these considerations and decisions, as the “appropriateness” of the implemented due diligence processes implemented is a key BAFA assessment criterion.

What should be considered when assessing the “appropriateness” of due diligence processes?

When planning and assessing the “appropriateness” of your due diligence processes, there are some important aspects to keep in mind:

  1. No hierarchy: Always remember that an assessment of the “appropriateness” of human rights due diligence processes under the BAFA guidelines does not depend on one single criterion, but that all four criteria must be taken into account.
  2. Effectiveness and appropriateness: A key feature that human rights due diligence processes must demonstrate is their “effectiveness”. According to BAFA, “effectiveness” and “appropriateness” are closely linked. The guidelines state that “appropriate” measures must be taken from a pool of “effective” measures. This is based on the assumption that the measures can only be considered to be appropriate, if chosen from a selection of effective instruments, i.e., that measures cannot be appropriate if they are not effective.
  3. Duty of effort: The due diligence obligations set out in the LkSG require companies to demonstrate that serious efforts have been made to minimise, prevent or eliminate risks and violations in their direct supply chains. However, when it comes to the “appropriateness” of measures within a company’s own operations, both the law as well as the guidelines clearly stipulate that the preventive and, in particular, remedial measures must always lead to the cessation of a human rights violation.

The BAFA guidelines also provide specific guidance on the implementation of an appropriate risk management system, risk identification and prioritisation, preventive and remedial measures as well as grievance mechanisms. While the guidelines are not a legally binding document, they provide a helpful and comprehensive set of guiding questions for companies to use in assessing the “appropriateness” of their due diligence efforts. Finally, the guidelines refer to additional material that can be used to assist companies in establishing meaningful human rights and environmental due diligence processes.

If you need support for implementing risk analyses or for any other requirement under the Supply Chain Act, or if you have any other questions concerning human rights in your company, get in touch:

Alice Homuth
Consultant
alice@loening.org