The German supply chain act (LkSG) requires companies to establish an appropriate and effective risk management system to detect, prevent, minimize or solve environmental and social risks. This should be done using a risk-based approach.
I. How to do the risk assessment:
Risk analysis must be carried out appropriately. On the one hand, this means that systematic and comprehensible processes must be introduced for identifying, weighing, and prioritizing risks, whereby each company is entitled to a certain degree of discretion with regard to design and choice of method.
II. When to do the risk assessment:
Own business level + direct supplier: regular intervals (yearly)
Sub-supplier: event-related intervals (2 options)
The subject of the event-related risk analysis after substantiated knowledge is the possible violation of a human rights or environmental obligation at one or more indirect suppliers. Substantiated knowledge means that the company has factual indications that make a violation of a human rights-related or environmental obligation of indirect suppliers appear possible. This can be the case, for example, through a report to a complaints channel, information in the media, or a civil society report, as well as discussions on cases or problems in existing industry initiatives.
When changes in business activities or supply chains occur (e.g. through investment or product diversification). Companies are advised to take a proactive approach. If a company already knows that high human rights or environmental risks are to be expected in the deeper supply chain of the company or in individual raw material or material supply chains, companies are advised to integrate the relevant parts of the supply chain into the regular annual risk analysis. In short, those who consider the risks in the deeper supply chain from the outset often save a great deal of effort later on for event-related risk analysis and the resulting updating of their own preventive measures.
III. What needs to be covered?
Social:
Violation of the prohibition of child labor
Violation of the prohibition of forced labor and all forms of slavery
Disregard for occupational health and safety and work-related health hazards
Violation of the freedom of association and collective bargaining
Violation of the prohibition of unequal treatment in employment
Violation of the prohibition of withholding a fair wage
Destruction of natural resources through environmental degradation
Unlawful violation of land rights
Violation of the prohibition on hiring or using private/public security forces that may cause harm due to lack of instruction or control
Environmental:
Violation of a prohibition resulting from the Minamata Convention
Violation of the prohibition of production and/or use of substances within the scope of the Stockholm Convention (POPs), as well as non-environmentally sound handling of wastes containing POPs
Violation of the ban on import and export of hazardous wastes as defined by the Basel Convention
In Practice
IV. Which steps are involved and which results should be achieved?
Step 1: Regular risk assessment of own business levels and direct suppliers:
1. Abstract view on risk (industry-specific and country-specific). Identification of risks and persons/groups affected by them.
Focus: What human rights or environmental risks arise where in relation to the own businesses` or direct suppliers’ business activities?
Results: The company knows which human rights and environmental risks occur in which of its procurement countries and which groups are potentially affected. It also knows which risks are typical for the industry.
2. Concrete analysis of risk based on the § 3 Abs. 2 criteria:
Nature and scope of the business activity
Probability of occurrence
The severity of the violation by degree, number of people affected, and irreversibility.
Possibility of influence
Causation contribution of the company to individual risks or risk areas
Focus: Which risks are relevant for the own business activities or those of specific high-risk suppliers? Which risks must the company prioritize?
Procedure: Risks are identified, weighted, and prioritized transparently, comprehensibly, and in accordance with a consistently applied system. In the case of missing data, the company documents and justifies information gaps and demonstrates corresponding efforts to obtain data.
Results: The company knows its high-risk suppliers or countries/regions and the priority risks arising in the respective context.
Step 2: Occasional Risk assessment:
1. Abstract view on risk (industry-specific and country-specific). Identification of risks and persons/groups affected by them.
Focus: What human rights or environmental risks arise where in relation to the sub-suppliers' business activities?
2. Concrete analysis of risk based on the § 3 Abs. 2 criteria:
Nature and scope of the business activity
Probability of occurrence
The severity of the violation by degree, number of people affected, and irreversibility.
Possibility of influence
Causation contribution of the company to individual risks or risk areas
Focus: Which risks are relevant for which sub-suppliers? Which risks must the company prioritize?
Procedure: Risks are identified, weighted, and prioritized transparently, comprehensibly, and in accordance with a consistently applied system. In the case of missing data, the company documents and justifies information gaps and demonstrates corresponding efforts to obtain data.
Result: The company knows whether new or changed priority risks occur at the level of indirect suppliers. In addition, the company knows whether new or changed preventive measures are necessary to deal with these risks.
How can we help with the new Sustainability Risk Assessment (SRA) Module & Agriplace Chain?
Effectively assessing risk
Risk assessment for regular intervals (direct suppliers) and as a proactive measure to identify high-risk sub-suppliers.
Risk assessment for changes in business activities (e.g. deciding to source oranges from South Africa rather than Zimbabwe).
User will reduce information gaps and demonstrates corresponding efforts to obtain data.
Prioritization of risks
Prioritization of risks. Where to spend the resources most effectively.
Increasing supply chain transparency by clearly displaying the full supply chains.
Prevention and correction
Preventive measures (e.g. only sourcing from producers of which social certificates are available that are known to reduce the social risk identified in the risk assessment).
Corrective measures. Adjust future quality requirements for high-risk suppliers or sub-suppliers to include evidence documents that prove to reduce the risk identified in the risk assessment.
Substantiated foundation for the due-diligence reporting.
We hope you find this article useful. As always, if you have any questions or feedback, please don't hesitate to contact us at info@agriplace.com or simply request a demo now.