The coalition Government of Germany has released an agreement that includes the immediate elimination of the country’s human rights and environmental supply chain due diligence law, also known as the Supply Chain Act (LkSG). In its place, the government will adopt the EU's new Corporate Sustainability Due Diligence Directive (CS3D), which has its complications. 

The private market firms, asset managers, and impact investors that struggled under the LkSG's requirements can take a break for a while but also prepare for the upcoming EU directive, which could impose even greater compliance burdens. 

Let’s explore the elimination of LkSG in detail. 

About the Supply Chain Act of Germany

Came into effect on January 1, 2023, the Supply Chain Act, aka LkSG, requires large German companies (including subsidiaries and branches of foreign multinationals) to assess and address human rights and environmental impact in their business and supply chains. Initially applicable to companies with 3,000 or more employees, the scope of the law expanded in 2024 to include firms with 1,000 or more employees. Under the act, companies are required to implement risk management systems, conduct regular risk analyses, and take preventive and remedial measures to address violations of human rights or environmental standards within their supply chains. 

From the very start, the Supply Chain Act faced a lot of criticism from businesses and stakeholders because of its costs and operational challenges. However, now it's completely terminated by Germany. 

Key aspects of the elimination of Germany’s Supply Chain Act

• Germany plans to replace the LkSG with the EU-wide Corporate Sustainability Due Diligence Directive (CSDDD). However, according to the new Omnibus proposal, the CSDDD will begin implementation in mid-2028 and likely require less monitoring than LkSG.
• With the elimination of LkSG, the agreement mentioned its support for the Omnibus proposal of the EU Commission, which seeks to ease the regulatory burden, especially for SMEs. The idea for LkSG elimination is to reduce the scope of due diligence obligations and ease sustainability reporting requirements for smaller businesses.
• While the repeal of the LkSG may ease immediate pressures on small German businesses, the critics argue that it may not have good broader implications. Critics mention that eliminating national-level laws like the LkSG may dilute accountability for human rights and environmental violations in global supply chains during the transition period.

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