ESG compliance in Germany: a guide for SMEs

The Lieferkettensorgfaltspflichtengesetz (LkSG) — commonly called the Supply Chain Due Diligence Act — requires large German companies to identify, prevent, and remedy human rights and environmental violations throughout their supply chains. It is one of the strictest national supply chain laws in the world.

The law applies in two phases:

• From 1 January 2023: Companies with 3,000 or more employees in Germany
• From 1 January 2024: Companies with 1,000 or more employees in Germany

Directly affected companies must conduct annual risk analyses of their own operations and their direct (Tier 1) suppliers. Where a risk is identified, they must take preventive and remedial action — which includes requiring suppliers to provide evidence of compliance and, if necessary, terminating the business relationship.

The LkSG covers the following risk areas, which your German customers may audit you against:

• Human rights: Child labour, forced labour, freedom of association, fair wages, discrimination, health and safety
• Environment: Mercury pollution, persistent organic pollutants, hazardous waste export, and deforestation-linked violations
• Governance: Anti-corruption and anti-bribery obligations

In practice, this means your German customers will send you ESG questionnaires, supplier codes of conduct to sign, and may request supporting evidence (certifications, policies, audit reports). Failure to respond adequately can result in your customer being required to terminate the supply relationship.

The LkSG creates a direct obligation only for large German companies. However, the indirect effect on their supply chains is significant:

• If you supply goods or services to a German company with 1,000+ employees, you are within scope of their LkSG due diligence obligations
• Your customer must conduct a risk analysis of your operations and may require you to complete a questionnaire, sign a supplier code of conduct, or provide third-party certifications
• If a risk is identified at your site, your customer is required to take action — which could include requiring remediation or terminating the contract
• The Federal Office of Economics and Export Control (BAFA) enforces the LkSG and can impose fines of up to €8 million or 2% of global annual turnover on non-compliant German companies

The practical effect is that any SME in the supply chain of a large German company — regardless of where the SME is based — will face LkSG-driven ESG requirements.

The EU's Corporate Sustainability Due Diligence Directive (CSDDD) extends LkSG-style obligations across the entire EU. While the LkSG applies only to German companies, CSDDD will apply to large companies across all EU member states:

• From 2027: EU companies with >5,000 employees and >€1.5 billion global turnover
• From 2028: EU companies with >3,000 employees and >€900 million global turnover
• From 2029: EU companies with >1,000 employees and >€450 million global turnover

CSDDD is broader than the LkSG in some respects (it covers indirect suppliers in high-risk sectors) but narrower in others (higher employee thresholds). For businesses already preparing for LkSG, CSDDD preparation is largely the same work. See the EU guide for full CSDDD details.

In addition to the LkSG, large German companies face several other ESG reporting obligations that create supply chain data demands:

• CSRD: Large German companies are subject to the EU's Corporate Sustainability Reporting Directive, requiring comprehensive sustainability reporting including value chain data from 2025 onward (phased by company size)
• EU Taxonomy: German companies reporting under CSRD must classify their activities against the EU Taxonomy for sustainable activities
• GHG Protocol: Most large German companies report Scope 1, 2, and 3 emissions — Scope 3 Category 1 (purchased goods and services) comes directly from suppliers

• BAFA — LkSG enforcement and guidance (German)
• LkSG full text (German Federal Law)
• EU CSDDD Directive text