Introduction
Environmental, social, and corporate governance (ESG) is a framework that focuses on a company’s impact on the environment, society and on its own internal decision-making systems and structures. In connection with this framework, international efforts such as the United Nations Guiding Principles on Business and Human Rights (UNGPs) have focused on preventing or minimising transnational companies’ negative effects on human rights and the environment. An important pillar in this context is the regulation of global value chains[1] through domestic regulations, such as in Australia, France, the Netherlands, Norway, the UK, and the USA.[2]
In Germany, the response to these developments culminated into the adoption of the Act on Due Diligence in Supply Chains (Lieferkettensorgfaltspflichtengesetz or LkSG), which entered into force on 1 January 2023.[3] The LkSG is aimed at turning the UNGPs into binding obligations for companies[4] and at enhancing the protection of human rights and the environment by introducing due diligence obligations for certain companies and their domestic and international supply chains.
Being a novel legislation, there remain many questions with respect to the application of the LkSG both in Germany and abroad.[5] However, we can safely expect the LkSG to have an impact on companies domiciled in Turkey in light of Germany being Turkey’s biggest trade partner in the EU.[6] This article provides a brief overview of the LkSG before exploring its potential implications for companies domiciled in Turkey.
General Overview of the LkSG
Personal Scope
The LkSG creates human rights and environmental due diligence obligations for companies domiciled in Germany. The scope of application of the LkSG covers sale of goods as well as provision of services (including financial services), and the LkSG applies to companies from all sectors, whether public or private.[7] Section 1(1) of the LkSG stipulates that German companies that have at least 3,000 employees are subject to the provisions of the LkSG. This threshold has been decreased to 1,000 employees starting from 1 January 2024. Although the LkSG applies to sizeable companies, small and medium-sized companies may also be affected by the LkSG insofar as they are subsidiaries[8] or suppliers[9] of companies subject to the LkSG.
The companies within the scope of the LkSG are under due diligence obligations in connection with the activities of their subsidiaries (including their subsidiaries’ supply chains) if they exercise a ‘decisive influence’ on them (Section 2(6)). The LkSG employs the term decisive influence in lieu of ‘controlling influence’ that is used in the German Stock Corporation Act (Aktiengesetz or AktG) but does not define what decisive influence means. It is generally accepted that decisive influence constitutes a high threshold and exists if the companies concerned are so closely intertwined in terms of capital which creates the possibility of uniform management that is actually exercised.[10]
In terms of suppliers, the LkSG makes a distinction between direct and indirect suppliers:[11] A direct supplier is defined as ‘a partner to a contract for the supply of goods or the provision of services whose supplies are necessary for the production of the enterprise’s product or for the provision and use of the relevant service’ (Section 2(7)), whereas an indirect supplier is ‘any enterprise which is not a direct supplier and whose supplies are necessary for the production of the enterprise’s product for the provision and use of the relevant service’ (Section 2(8)). It is noteworthy that the LkSG limits the definition of direct and indirect suppliers by referring to “necessary” supplies for a company’s product or services.[12] For instance, a cotton producer may be considered as a supplier of a textile company, whereas a catering company providing optional meals to the same textile company’s employees may not be a supplier under the LkSG because the service it provides is not necessary for the textile company’s products.
Due Diligence Obligations
Pursuant to Section 3(1) of the LkSG, companies must comply with due diligence obligations in their supply chains with respect to the human rights and environment-related risks enumerated in Sections 2(2) and 2(3). The due diligence obligations provided by the LkSG are obligations of conduct (means) rather than obligations of result.[13] The exact scope of these obligations should be assessed on a case-by-case basis (Section 3(2)). Relevant criteria in this regard may include the nature and scope of business activities, the company’s ability to influence it supply chain, severity of a violation and the company’s causal contribution to a violation.[14]
The LkSG puts a great emphasis on human rights when compared to the environment. Indeed, the human rights risks include general descriptions of child labour, forced labour, slavery, workplace safety and health, freedom of association, discrimination, adequate living wage, protection of food and water resources, protection of farmlands and use of security forces in line with numerous international conventions listed in the LkSG’s Annex, whereas environment-related risks are limited to the activities under three environmental conventions: the Minamata Convention on Mercury, the Stockholm Convention on Persistent Organic Pollutants, and the Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and their Disposal.[15]
The companies, to which the LkSG applies, must comply with human rights and environmental due diligence obligations along their supply chains, including for activities in Germany or abroad and starting from the extraction of raw materials until the delivery of final products or services (Section 2(5)). In connection with the abovementioned human rights and environment-related risks, the LkSG foresees the following due diligence obligations for the company’s own business operations:
- Establishing an appropriate and effective risk management system to comply with due diligence obligations (Section 4(1))
- Designating a person or persons within the company who would be responsible for monitoring risk management (Section 4(3))
- Performing regular risk analyses (Section 5)
- Taking and reviewing appropriate preventive and remedial measures (Sections 6(1), 6(3), and 7(1))
- Issuing a policy statement on the company’s human rights strategy which must be adopted by the senior management (Section 6(2))
- Establishing an appropriate internal complaints procedure for reporting human rights and environment-related risks and violations (Section 8)
- Documenting the fulfilment of due diligence obligations (Section 10(1)) and preparing an annual report on the fulfilment of due diligence obligations (Section 10(2))
For violations of due diligence obligations, Sections 22-24 of the LkSG foresee the exclusion from the award of public contracts up to three years and establishes financial penalties and administrative fines up to EUR 800,000 (or 2% of the average annual turnover for companies whose average annual turnover exceeds EUR 400 million) enforced by the Federal Office for Economic Affairs and Export Control (Bundesamt für Wirtschaft und Ausfuhrkontrolle – BAFA). Besides these administrative procedures, the LkSG does not constitute a separate basis for liability under civil law or the German Civil Code (Bürgerliches Gesetzbuch – BGB).[16]
The LkSG’s Potential Implications in Turkey
Domestic due diligence regulations on supply chains such as the LkSG produce extraterritorial effects in that they affect the business operations of companies located in countries other than where the regulation is adopted.[17] In view of the high trade volume between Germany and Turkey, it is expected that the LkSG would impact the activities of two types of companies domiciled in Turkey: (1) subsidiaries[18] and (2) direct and indirect suppliers[19] of German companies that are subject to human rights and environmental due diligence obligations under the LkSG.
The LkSG creates due diligence obligations for German companies in connection with their subsidiaries and suppliers (in Germany or abroad). Although Turkish subsidiaries and suppliers of companies subject to the LkSG are not directly required to comply with any due diligence obligations, the LkSG provides for certain obligations in this respect which are to be observed by the German companies themselves. Complying with these obligations would likely require German companies to make certain changes to their existing relationships with their Turkish subsidiaries and suppliers.
As explained above, a foreign subsidiary of a German company falls within the business area of its parent company if it exercises decisive influence over its subsidiary. As a result of this, German companies must fully comply with all due diligence obligations under the LkSG for their Turkish subsidiaries fulfilling this decisive influence criterion.
The companies subject to the LkSG must conduct appropriate risk analyses (Section 5) and adopt preventive (Section 6(4)) and remedial measures (Section 7(1)) for human rights and environment-related risks at direct suppliers.[20] In contrast to these continuous due diligence obligations in connection with direct suppliers,[21] the LkSG foresees human rights and environmental due diligence obligations for indirect suppliers in the event that the company has ‘substantiated knowledge’ regarding a violation (Section 9).[22] Substantiated knowledge exists if the company has verifiable and serious information about a possible human rights or environmental violation committed by its indirect suppliers.[23] Examples for sources of obtaining substantiated knowledge may include complaints received via the internal complaint procedure under Section 8, NGO reports on poor human rights or environmental conditions in the production region of an indirect supplier, indirect supplier’s involvement in high-risk industries in terms of human rights, and the environment or previous incidents involving an indirect supplier.[24]
Other obligations of companies vis-à-vis their direct and indirect suppliers include defining in the company’s policy statement the human rights and environment-related expectations placed on suppliers (Section 6(2)) and ensuring that the complaints procedure of the company covers the activities of its suppliers (Sections 8 and 9(1)).
Considering the absence of a legal framework in Turkey aimed at holding businesses liable for their human rights and environment-related violations,[25] Turkish subsidiaries and suppliers of companies subject to the LkSG may face difficulties in complying with their due diligence obligations. For example, a leading Italian chocolate company, Ferrero Rocher has announced that they are facing child labour problems in their hazelnut supply chains in Turkey.[26] Similarly, a major French cosmetics company, Yves Rocher, currently faces court proceedings under the French law on the duty of vigilance based on claims relating to its Turkish subsidiary’s violations of workers’ rights and trade union rights.[27] Since the LkSG covers child labour and workers’ rights as human rights-related risks,[28] had these two companies been subject to the LkSG, the activities of their suppliers and subsidiaries could have given rise to breaches of the LkSG (eg, obligation to take preventive or remedial action).
Although German companies expect little to no change in their supply chains and do not largely plan to relocate their foreign production as a result of the LkSG,[29] it is highly probable that they would require additional safeguards from their suppliers and subsidiaries in Turkey in terms of the protection of human rights and the environment. For instance, they can obtain contractual warranties that a supplier would comply with human rights or environment-related expectations (Section 6(4)(1)), provide training (Section 6(4)(2)) or require their suppliers in Turkey to only use products or raw materials from approved providers or regions.[30] Indeed, some companies, such as BASF, a large German chemistry company, started to include new clauses in their (and their subsidiaries’) contracts providing for due diligence obligations vis-à-vis their Turkish suppliers.[31]
As a result, Turkish suppliers that can demonstrate a high level of compliance with respect to human rights and the environment may gain a competitive advantage.[32] This could lead to a new business environment in Turkey where companies give great importance to human rights and environmental due diligence[33] and to the future adoption of a regulation in this regard by the Turkish parliament, following the footsteps of the Human Rights Action Plan and Implementation Schedule published by the Turkish Ministry of Justice.[34]
Conclusion
The German government is expected to evaluate the effectiveness of the LkSG in 2026. By then, many Turkish subsidiaries and suppliers of German companies will have to adapt to the changes brought about by these new human rights and environmental due diligence obligations. Although the LkSG contains comprehensive obligations, early adaptors in Turkey (especially suppliers) may gain significant advantages over their competitors, both in Turkey and elsewhere. In addition, preparing for compliance with the LkSG may also help Turkish companies in the event of a new regulation in Turkey or when the European Supply Chain Directive[35] is adopted, likely by 2025.
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[1] Caroline Omari Lichuma, ‘(Laws) Made in the ‘First World’: A TWAIL Critique of the Use of Domestic Legislation to Extraterritorially Regulate Global Value Chains’ (2021) 81(2) Heidelberg Journal of International Law 497, 501; Anne-Christin Mittwoch and Fernanda Luisa Bremenkamp, The German Supply Chain Act – A Sustainable Regulatory Framework for Internationally Active Market Players? (1st edn, Institut für Wirtschaftsrecht 2022) 6-8; Kellie R. Tomin, ‘Germany Takes Action on Corporate Due Diligence in Supply Chains: What the United States Can Learn From International Supply Chain Regulations’ (2022) 18(2) Loyola University Chicago International Law Review 189.
[2] See Robert Grabosch, ‘Companies and Human Rights: A Global Comparison of Legal Due Diligence Obligations’ (2020) Friedrich Ebert Stiftung <https://library.fes.de/pdf-files/iez/16784.pdf>; Markus Krajewski, Kristel Tonstad and Franziska Wohltmann, ‘Mandatory Human Rights Due Diligence in Germany and Norway: Stepping, or Striding, in the Same Direction?’ (2021) 6(3) Business and Human Rights Journal 550.
[3] Act on Corporate Due Diligence Obligations for the Prevention of Human Rights Violations in Supply Chains of 16 July 2021 <https://www.csr-in-deutschland.de/SharedDocs/Downloads/EN/act-corporate-due-diligence-obligations-supply-chains.pdf?__blob=publicationFile>; Christian Gehling, Nicolas Ott and Cäcilie Lüneborg, ‘Das neue Lieferkettensorgfaltspflichtengesetz – Umsetzung in der Unternehmenspraxis’ (2021) 14(5) Corporate Compliance Zeitschrift 230, 231. For a brief description of the legislative history: See Krajewski, Tonstad and Wohltmann (n 2).
[4] Bettina Braun, Sarah Dadush and Daniel Schönfelder, ‘Complying with Mandatory Human Rights Due Diligence Legislation through Shared-Responsibility Contracting: The Example of Germany’s Supply Chain Act (LkSG)’, forthcoming in Contracts for Responsible and Sustainable Supply Chains: Model Contract Clauses, Legal Analysis, and Practical Perspectives (ABA Business Law Section 2023) <https://ssrn.com/abstract=4389817>, 10; Christian Stemberg, ‘Die drei „Schlüsselkriterien“ des Beschwerdeverfahrens nach § 8 Lieferkettensorgfaltspflichtengesetz’ (2022) 15(4) Corporate Compliance Zeitschrift 92, 94-95; Gunther Meeh-Bunse, ‘The German Supply Chain Act in the Context of Sustainable Development’ (2022) 4(1) Proceedings of FEB Zagreb International Odyssey Conference on Economics and Business 63, 64-67.
[5] Lucina Berger, ‘Lieferkettenverantwortung aus Unternehmens- und Beratersicht: Notwendigkeit oder Überforderung?’ (2022) 51(4-5) Zeitschrift für Unternehmens- und Gesellschaftsrecht 607, 613-616.
[6] Turkish Ministry of Trade, Monthly Foreign Trade Statistics Tables – February 2023 <https://www.trade.gov.tr/statistics/foreign-trade-statistics/monthly-foreign-trade-statistics-tables-february-2023>.
[7] Maximilian Bettermann and Volker Hoes, ‘Das Lieferkettensorgfaltspflichtengesetz – Besondere Pflichten für Kreditinstitute?’ (2022) 22(1) Zeitschrift für Bank- und Kapitalmarktrecht 23, 23-34.
[8] Vera Rothenburg and Hanna Rogg, ‘Die Umsetzung des Lieferkettensorgfaltspflichtengesetzes im Konzern’ (2022) 67(8) Die Aktiengesellschaft 257, paras 15-16, 52.
[9] Erik Ehmann and Daniel F. Berg, ‘Das Lieferkettensorgfaltspflichtengesetz (LkSG): ein erster Überblick’ (2021) 13(15) Gesellschafts- und Wirtschaftsrecht 287, 292.
[10] Rothenburg and Rogg (n 8) paras 20-22.
[11] For a criticism of this distinction see David Krebs, ‘Environmental Due Diligence Obligations in Home State Law with Regard to Transnational Value Chains’ in Peter Gailhofer, David Krebs, Alexander Proelss, Kirsten Schmalenbach and Roda Verheyen (eds) Corporate Liability for Transboundary Environmental Harm: An International and Transnational Perspective (Springer 2023) 267.
[12] Bettermann and Hoes (n 7) 25.
[13] Vanessa Dohrmann, ‘Das deutsche Lieferkettensorgfaltspflichtengesetz als Vorbild für den europäischen Gesetzgeber? – Eine kritische Analyse’ (2021) 14(6) Corporate Compliance Zeitschrift 265, 267; Eric Wagner and Marc Ruttloff, ‘Das Lieferkettensorgfaltspflichtengesetz – Eine erste Einordnung’ (2021) 74(30) Neue Juristische Wochenschrift 2145, paras 4-5.
[14] Initiative Lieferkettengesetz, ‘FAQ on Germany’s Supply Chain Due Diligence Act’ (2021) <https://lieferkettengesetz.de/wp-content/uploads/2021/11/Initiative-Lieferkettengesetz_FAQ-English.pdf>.
[15] Patricia Sarah Stöbener de Mora and Paul Noll, ‘Grenzenlose Sorgfalt? – Das Lieferkettensorgfaltspflichtengesetz’ (2021) 24(28) Neue Zeitschrift für Gesellschaftsrecht 1237, 1239-1340.
[16] Giesela Rühl, ‘Cross-border Protection of Human Rights: The 2021 German Supply Chain Due Diligence Act’, forthcoming in Borg-Barthet, Živković et al (eds), Gedächtnisschrift in honor of Jonathan Fitchen <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4024604> 5-7. See Abbo Junker, ‘Das Lieferkettensorgfaltspflichtengesetz – Und wo bleibt das Positive’ (2021) 52(4) Zeitschrift für Arbeitsrecht 437; Raphael Koch, ‘Das Lieferkettensorgfaltspflichtengesetz Compliance, Sorgfaltspflichten und zivilrechtliche Haftung’ (2022) 76(1) Monatsschrift für Deutsches Recht 1; Aline Fritz and Jonatan Klaedtke, ‘Lieferketten im Vergabeverfahren: Sofortige und zukünftige Änderungen durch das Lieferkettensorgfaltspflichtengesetz’ (2021) 23(3) Neue Zeitschrift für Baurecht und Vergaberecht 131.
[17] Galit A. Sarfaty, ‘Shining Light on Global Supply Chains’ (2015) 56(2) Harvard International Law Journal 419, 421. See also Anna-Maria Heil, ‘Menschenrechte in Lieferketten: Trend zur Verrechtlichung’ (2022) 36(8) Wirtschaftsrechtliche Blätter 438, 443.
[18] Rothenburg and Rogg (n 8) para 38.
[19] Çiçek Ersoy and Hatice Çamgöz Akdağ, ‘Recent Developments in Supply Chain Compliance and in Europe and Its Global Impacts on Businesses’ in Numan M. Durakbaşa and M. Güneş Gençyılmaz (eds) Digitizing Production Systems (Springer 2022) 579. See also Letter from the Turkish Ministry of Trade’s Directorate General of International Service Trade numbered E-86541099-724.01.01-00076474188 and dated 19 July 2022 <https://www.gebzeto.org.tr/wp-content/uploads/2022/08/Almanya-Tedarik-Zinciri-%C3%96zen-Y%C3%BCk%C3%BCml%C3%BCl%C3%BC%C4%9F%C3%BC-Yasas%C4%B1.pdf>.
[20] See Mehmet Köksal, Alman Tedarik Zinciri Özen Yükümlülüğü Kanunu Çerçevesinde Risk Analizi ve Rapor Hazırlama Yöntemleri (1st edn, Aristo 2022); Federal Office for Economic Affairs and Export Control, ‘Identifying, weighting and prioritizing risks: Guidance on conducting a risk analysis as required by the German Supply Chain Due Diligence Act ‘Lieferkettensorgfaltspflichtengesetz’ or ‘LkSG’’ (2022) <https://www.bafa.de/SharedDocs/Downloads/EN/Supply_Chain_Act/guidance_risk_analysis.html?nn=1444740>; Livia Buttke, Hannes Rössel and Frank Ebinger, ‘Risikoanalyse nach den Anforderungen des deutschen Lieferkettensorgfaltspflichtengesetzes’ (2022) 37(3) Ökologisches Wirtschaften 27.
[21] See Stefan Korch, ‘Überprüfungs- und Aktualisierungspflichten nach dem Lieferkettensorgfaltspflichtengesetz’ (2022) 75(29) Neue Juristische Wochenschrift 2065.
[22] Krajewski, Tonstad and Wohltmann (n 2) 556. See also Initiative Lieferkettengesetz, ‘What the New Supply Schain Act Delivers – and What It Doesn’t’ (2021) <https://lieferkettengesetz.de/wp-content/uploads/2021/06/Initiative-Lieferkettengesetz_Analysis_What-the-new-supply-chain-act-delivers.pdf>.
[23] See Christian Stemberg, ‘Zur substantiierten Kenntnis nach § 9 III Lieferkettensorgfaltspflichtengesetz’ (2022) 25(23) Neue Zeitschrift für Gesellschaftsrecht 1093.
[24] Gehling, Ott and Lüneborg (n 3) 237; Ehmann and Berg (n 9) 290. See also Wagner and Ruttloff (n 13) para 30; Stemberg (n 4).
[25] Zeynep Derya Tarman, ‘İş Dünyası ve İnsan Hakları Zorunlu İnsan Hakları Durum Tespit Yükümlülükleri’ (2022) 71(3) Ankara Üniversitesi Hukuk Fakültesi Dergisi 1183, 1214; Çiğdem Çımrın, Pınar Kara and Fatmanur Caygın, ‘Alman Tedarik Zincirleri Yasası’nın Türkiye’ye Etkileri: Şirketlerin durum tespiti yükümlülükleri ve öngörüler’ (2023) Friedrich Ebert Stiftung 8 <https://library.fes.de/pdf-files/bueros/tuerkei/20112.pdf>. See also Mehmet Köksal, Alman Tedarik Zinciri Özen Yükümlülüğü Kanunu Çerçevesinde Şirketlerin Sorumluluğu (1st edn, Aristo 2022) 55-59.
[26] Tarman (n 25) 1187.
[27] Sherpa, ‘French cosmetics company Yves Rocher facing court proceedings for failure to ensure freedom of association and workers’ rights in Turkey’ (2022) <https://www.asso-sherpa.org/french-cosmetics-company-yves-rocher-facing-court-proceedings-for-failure-to-ensure-freedom-of-association-and-workers-rights-in-turkey>.
[28] Ulaş Baysal and Çiçek Ersoy, ‘Alman Tedarik Zincirleri Özen Yükümlülükleri Kanunu (Lieferkettensorgfaltspflichtengesetz) ve Türkiye’deki Çalışma İlişkilerine Etkileri’ (2022) 48(2) Sicil İş Hukuku Dergisi 72, 81-82.
[29] Anastasiia Omelchuk and Achim Sponheimer, ‘Bedeutung des Lieferkettensorgfaltspflichtengesetzes (LkSG) für die pharmazeutische Industrie’ (2023) 85(3) Pharmind 234, 238; Galina Kolev and Adriana Neligan, ‘Effects of a supply chain regulation: Survey-based results on the expected effects of the German Supply Chains Act’ (2022) Institut der Deutschen Wirtschaft Report 8/2022, 14.
[30] Tobias Brouwer, ‘Noch viele offene Rechts- und Auslegungsfragen zum Lieferkettensorgfaltspflichtengesetz – Hinweise zum VCI-Diskussionspapier zur Umsetzung des LkSG’ (2022) 15(5) Corporate Compliance Zeitschrift 137, 144; Ehmann and Berg (n 9) 293.
[31] Article 5, General Conditions of Purchase of BASF Türk Kimya Sanayi ve Ticaret Ltd. Şti. and its Subsidiaries in Turkey <https://www.basf.com/global/documents/en/about-us/suppliers-and-partners/download-center/BASFGroupTurkey_GeneralConditionsofPurchase_TR.pdf >.
[32] Köksal (n 25) 68. See also Sebastian Konrads and Stine Walter, ‘Das neue Lieferkettensorgfaltspflichtengesetz – Herausforderungen, Chancen und Ausblick’ (2022) 15(4) Zeitschrift für Außen- und Sicherheitspolitik 373, 380; Muhammed Tarhan, ‘New German supply chain law offers opportunities for Türkiye, says envoy’ (2023) Anadolu Ajansı <https://www.aa.com.tr/en/economy/new-german-supply-chain-law-offers-opportunities-for-turkiye-says-envoy/2796078>.
[33] See Değer Akal, ‘Tedarik Zinciri Yasası: Türkiye nasıl etkilenecek?’ (2023) Deutsche Welle <https://www.inspiredminds.de/tr/tedarik-zinciri-yasas%C4%B1-t%C3%BCrkiye-nas%C4%B1l-etkilenecek/a-63291647>; Wanja Wellbrock, ‘Ganzheitliches Risikomanagement in der Lieferkette – Strategisches Potenzial des Lieferkettensorgfaltspflichtengesetzes’ (2022) 75(1) ifo Schnelldienst 12, 15; Andreas Rühmkorf, ‘The German Supply Chain Law: A First Step Towards More Corporate Sustainability’ (2023) 20(1) European Company Law 6, 12-13.
[34] Tarman (n 25) 1214.
[35] See Ludger Giesberts, ‘Sorgfaltspflichten für die Lieferkette: Das deutsche Gesetz und der EU-Richtlinienentwurf’ (2022) 41(20) Neue Zeitschrift für Verwaltungsrecht 1497; Peter Jung, ‘Werteschöpfung in der Liefer- und Absatzkette? — Zum Kommissionsvorschlag für eine Richtlinie über die Sorgfaltspflichten von Unternehmen im Hinblick auf Nachhaltigkeit’ (2022) 19(3) Zeitschrift für das Privatrecht der Europäischen Union 109.
