The draft law amending the LkSG was published on 29 August by the German Ministry of Labor and Social Affairs on its website. This is the beginning of a legislative process.
The draft law mirrors the coalition agreement from April and, as expected, amends the current LkSG ahead of the EU Corporate Sustainability Due Diligence Directive’s (CSDDD) transposition into German law. The law amending the Act will be implemented in a “low-bureaucracy” and “enforcement-friendly” manner.
Below, we break down the two key amendments to the current LkSG regime:
Companies will not need to report, but they will still need to document due diligence activities.
The elimination of the reporting obligation under the LkSG is the key change. This means that if the draft is adopted as is, companies will be exempt from the annual duty to prepare, submit or publish a report until the CSDDD is transposed into German law. The elimination of the reporting obligation will apply retrospectively, meaning companies that were required to submit a report but have not, will not be in breach of LkSG requirements.[1]
It is also important to note that while in-scope companies will no longer have to report under the LkSG, all other due diligence requirements remain in place, including the documentation obligation.[2] The duty to document fulfillment of due diligence obligations remains unchanged and must be kept for at least seven years.
In addition, the current omnibus proposal does not foresee changes to the reporting obligation under the CSDDD. This means that, even if the current omnibus proposal is accepted as is, companies subject to the CSDDD will need to report annually on their due diligence activities. (The omnibus proposal amends the current requirement to monitor the effectiveness of due diligence activities annually to at least every five years.)
Eliminating the reporting requirement is a step backwards as it removes an important tool for promoting transparency and accountability. Companies that seek a trust-based dialogue with their stakeholders should be encouraged to continue reporting externally on their efforts, even if it is no longer mandatory.
In practice: Even if you are no longer required to produce a report under the amended German act, you must still track your due diligence activities for documentation purposes. Furthermore, if you (will) fall under the scope of the CSDDD or CSRD, it is also sensible to establish internal processes sooner than later to be prepared for sustainability reporting under these EU directives which will be transposed into national law.
Sanctions will be imposed only in cases of serious breaches of the law.
The other central element of the proposed amendments is the reduction of grounds for fines.[3] Failure to meet due diligence requirements will only be sanctioned in cases of serious breaches of the law, in other words, for failure to take timely preventive or remedial measures, or to establish an effective complaints mechanism.
However, according to the draft law, failures such as not appointing a human rights officer or not conducting a risk analysis will no longer be subject to fines. Failing to review the effectiveness of measures and grievance mechanisms or update them will also not lead to sanctions.[4]
The competent enforcement authority of the LkSG (and most likely, the national law to be transposed from the CSDDD) is the BAFA. The draft law explicitly states that the BAFA will continue to monitor possible human rights and environmental risks and violations ex officio at its own discretion.[5]
In practice: A human rights risk assessment is the basis for adopting effective preventive or remedial measures. These amendments are impractical (even absurd), because without proper risk identification, companies cannot address their human rights impacts effectively, and failure to act remains sanctionable.
In the absence of a robust human rights risk assessment and of strong human rights leadership within the organization, companies are more likely to face serious human rights violations in their own operations and supply chains and therefore, sanctionable breaches of the law. And without assessing whether the measures they take are effective or not, companies are more likely to waste resources on activities that do not actually prevent, end or minimize their human rights risks and impacts.
What’s next? When can companies expect the amended law to enter into force?
The August 29 publication of the draft law amending the LkSG is only the first step in the legislative process. Next, the regional states and associations will provide their positions on the draft (Stellungnahmen) in the form of comments or suggestions for improvement.
Following this feedback, the government will create a final version of the draft law and submit it for readings and deliberations of parliamentary committees. Following the readings, there will be a final vote on the law in the parliament (Bundestag).
The CORE Take:
It is logical and pragmatic for companies to establish effective due diligence systems that enable them to identify and prioritize risks and take necessary actions, including those the failure of which amount to serious breaches of the law and are sanctionable even under these new amendments.
Forward-thinking, responsible businesses will (and should) continue to carry out meaningful human rights due diligence, regardless of the outcome of these amendments. While the changes limit sanctions to serious breaches and (for now) remove the reporting obligation, even the most compliance-focused company will want to conduct effective due diligence that can prevent serious breaches of the law and therefore fines, and that can prepare the organization for other sustainability reporting requirements, including those under the CSDDD and the CSRD as well as various national corporate sustainability laws.
Cecilia and Serra for the CORE team
[1] According to the draft, this is to avoid companies having to incur in additional costs in retrospectively preparing reports for the years 2023 and 2024, insofar as they have not yet prepared these reports.
[2] See amendment to Section 10, which now reduces company’s obligation to “documentation” (as opposed to reporting and documentation)
[3] See amendments to Section 24 of the BMAS draft law.
[4] See amendments to Section 24 which eliminate Section 6 (5); Section (7) (4) sentence 1 and Section 8 (5) sentence 1, which deal with the review of the effectiveness of measures; the remedial action and the complaint mechanism, respectively and Section 6 (5) sentence 3; Section 7 (4) sentence 3 and Section 8 (5) sentence 2, which deal with updating the preventive measures; the remedial action and the complaints mechanisms respectively as a result of the effectiveness review.
[5] See page 8 of the draft law.
