Releasing the Supply Chain

Germany sure seems to know a thing or two about leading.

As vanguards of economic strength, they aren’t behind on setting quintessential precedents for social change either. A boisterous 4 years in the make, the German Supply Chain Due Diligence Act (better known as LkSG/GSCA) started off 2023, in motion.

The new package of rules pushes statutory importance on the consideration of the UN’s SDGs in commercial activities. Though the Modern slavery act in the UK, and the corporate law of vigilance in France were definitely first to come, they just rolled out the carpet for Germany on their way. The GCSA is considerably more holistic in its approach- encapsulating a larger set of methods done “The ESG way.”

As it undertakes ethical considerations along every step taken- from acquiring raw materials to getting a product on the market- the laws beg for more transparency and accountability by suppliers, partners, and employers, alike.

The Internal Economy

In a world where economic dynamism seizes influence over our lives, if it undergoes change at this scale- so does our ecosystem. The direction that the GCSA is steering Germany - and by effect, the rest of the world - in, will lead to the bridging of stark inequality gaps carelessly left behind by the ongoing mechanisms.

Though, we must accord some credit to the current processes for bringing us here. They fast-tracked the very digital age that has opened doors to an entirely new realm for us. With it, we’ve seen waves of activism larger than ever before- a collective demand for ethical practices across industries and boarders.

In its making- the act had its fair share of opposers. A judicial change of this magnitude would have to bring with it a sizeable bureaucratic burden. When firms already make dutiful voluntary contributions to the cause, an adjustment like this, would only lead to inefficiencies in the market. However, when those making such contributions fall short by a disappointing 35%, the government is forced to react.

It isn’t necessarily a disruption in the flow of business activity. By design, the smallest entities it can directly affect are those with over a thousand employees. Inferably well established firms that procure returns far greater than the cost of compliance.

At the same time, we can expect a trickle down effect on small businesses. While trickle down economics holds a reputation for its disproportionate motivators- this can be rather characterised as a step towards progressive systemic shift. Micro-businesses with a handful of employees account for a vast majority of the 3 million SMEs Germany harbours. At the budding stage, these laws are likely to be facilitated smoothly, than impede entry-to-market or competition.

The act essentially builds a self enforcing infrastructure for businesses to keep themselves in check, compliant with all objectives, and finding new ways to sustainably gain advantages over one another.

The First-Movers Advantage

Notably, the rest of the world isn’t left unglazed. With giant companies leading the automotive industry- Volkswagen, BMW, and Daimler spread their networks of manufacturing plants around the world. These companies employ hundreds of thousands of workers across the globe- making compliance an undoubtably mammoth task.

Suppliers and partners will have to match abiding agreements so as to protect their partnerships and clients from falling out. This however, is a rather drastic consequence. It is a common misconception that contracts will have to end and ties will have to be broken. The laws simply read that contracts must be revised to meet the standards and relations shall only be cut when there is no other remedial procedure to minimise violation.

This brings exciting new opportunities to foreign markets. The trickle down effect, analogous to that on SME’s, will seep its way into Asia and Africa’s basket of emerging economies. In their big break of economic prosperity- these countries can prioritise their growth with the help of Germany, while incorporating sustainability early on.

As the rest of the west waits to make a move, partnerships in soaring new cost centres like India and Vietnam would offer Germany a useful first mover’s advantage.

The EU

Brooding over the underestimated time and toil costs is futile, because this was long coming. If not Germany’s middle ground, these firms would have to face the inevitable and stricter due diligence laws imposed by the EU directly. Wanting to postpone incurring costs is only natural with a present bias. However, that would only be possible with the underlying assumption that discounted costs of the future would be the same. But in this receding economic climate, this is simply not true. If anything, the GCSA places a stepping stone for German companies to adjust to the future EU laws with ease.

Surprisingly, while Germany lays out an extensive framework for due diligence, they are also opposing that being drafted by the EU. Clashes with national and EU laws aren’t anything new however, quite similar to the EU ban on the German autobahn levy- the EU laws definitely hold more power. Germany’s request for safe harbour provisions is nothing but a reassurance of protection for their companies.

Transformation

A booming economy devoid of exploitation should not be such a bizarre ask. Taking matters into our own hands, we challenge, we boycott, we shame. But scratches to brand image have only lead to the rise of “greenwashing” in corporate culture. Human rights are still sidelined and sustainable change doesn’t come about effectively.

When companies have to put in an extra effort to not comply, they involuntarily stray into the wrong direction, away from their stance of “indifference.” A combination of ruthless abashment from the public and profit risking repercussions in doing so may be extreme but it may also be the only wakeup call they’ll hear.

Withstanding heavy compromise, the GCSAs take Germany one more step forward in conserving the present and future generations. By releasing the supply chain from the tight clutch of inequity, the country is creating the transformation we make social movements for.