Local Enterprises Tied to Large German Companies Face New Obligations on January 1, 2023

*The article in Macedonian language, published by Kapital can be found at the bottom of this page.

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While the European Union is currently contemplating a proposal – the Directive on Corporate Sustainability Due Diligence, Germany, one of the Republic of North Macedonia’s most important trade partners, has adopted a new Supply chain due diligence act. This Act would oblige affected companies to detect and prevent harmful consequences on the environment and human rights stemming not only from their own business operations, but, as well as from the business activities of all the companies with which they cooperate with, i.e. the companies in their supply chain.

Starting from January 1, 2023, this Act will apply to all companies either with a German headquarters or with a business presence in Germany through its company subsidiaries. The trigger is that they must have at least 3,000 employees, a number that will reduce to at least 1,000 employees as of January 1, 2024.

On the basis of a risk management system established in accordance with the United Nations Guiding Principles on Business and Human Rights, the new Act requires from the companies to conduct continuous analysis and prevention of any violations by their business partners in relation to:

1. the human rights, and primarily with regards to the prohibitions on:

• illegal forms of forced labor, including child labor, slavery, and similar practices;
• neglecting obligations regarding occupational safety and health;
• neglecting the freedom of association;

2. the environment, and primarily with regards to:

• prohibition of causing damage or pollution of soil, water or air and
• prohibitions and obligations stipulated by local legislation regulating the environment.

What would this mean for Macedonian companies that collaborate with companies to which this Act will apply, and what new responsibilities should they anticipate starting from the new year?

The imposition of the obligations on the Macedonian companies will arrive from the affected companies with whom they cooperate with. This is due to the fact that failure to comply with this Act would put the affected companies in risk to be imposed with fines which the Act stipulates either in form of a percentage from the yearly revenues or as a fix amount that could go up to 8,000,000 euros. As a result, it is clear that business cooperation with a particular partner may be terminated if the affected company cannot demonstrate it cooperates with a partner that is compliant with the aforementioned principles.

The affected companies are therefore expected to request the following from their business partners in North Macedonia: 

• To sign revised cooperation agreements, which will necessarily include obligations to harmonize its operations in accordance with the rules determined in the codes of conduct of German companies (which codes will be as well fully aligned with the aforementioned principles);
• To provide evidence of compliance in terms of respecting and protecting human rights as well as compliance with legal obligations for environmental protection;
• To be prepared and ready to occasional audits of their operations;
• To establish a procedure for reporting any violations and protection of the whistle-blowers in case of reported violations;
• To continuously complete questionnaires for self-assessment of compliance. 

An important perspective that should not be overlooked is that the affected companies will need to pay attention not only to the behavior of their business partners, but also to those entities with which their business partners cooperate – or so-called indirect business partners.

In order for the affected Macedonian companies to prepare for these requirements, they will need to:

• Conduct a review of their own policies through which they show compliance with human rights and legal obligations for environmental protection, and if they do not have such policies, adopt them as such;
• Take actions to remove or reduce any risks of violations, if such risks exist;
• Examine and verify the business partners and relationships within their own supply chain for compliance with human rights and legal obligations for environmental protection.

Consequently, the primary challenge for the private sector will be to demonstrate that it is compliant in practice, with both the established local legal norms and the norms arising from the international community, which are now being integrated into legal obligations for the affected German companies. While North Macedonia has adopted laws that govern and safeguard human rights and the environment, the challenge that remains for the country is further compliance with the laws of the European Union (EU acquis), as well as with the international frameworks set by the United Nations.

In addition, the fact that this Act is a German novelty and regulates human rights and environmental issues that are harmonized and fully covered under the ESG (Environmental, Social, and Governance) concept is a clear indication that the ESG concept is gaining a stronger legal framework, which Macedonian companies should expect not only from the EU regulation, but gradually from individual countries as well. As a result, it is essential for every affected Macedonian company to set behavioral standards through the adoption of effective and comprehensive internal policies and the implementation of processes that will monitor the execution of the relevant internal policies.

In conclusion to the above, for a Macedonian company to be considered compliant with the new German Act and the forthcoming EU ESG regulation, it should take the following steps:

• Conduct a GAP analysis on the current policies by diagnosing the existing procedures related to the prevention, mitigation, or elimination of threats for misdemeanor of obligations related to human rights or environmental protection.  In doing so, the company should consider the due diligence obligations, international regulations to which the new Act refers, such as the United Nations Guiding Principles on Business and Human Rights, the corporate policies of the German company with which it cooperates, as well as local laws and industry best practices;
• On the basis on the results of the GAP analysis, to undertake compliance activities, such as the development of new or additional procedures, modifications to current procedures, etc.;
• Continuously to expand the capacity inside its corporate structure, including trainings and development on ethical trade, human rights, gender equality, eradicating forms of modern slavery, building grievance mechanisms, and trade union-based worker representation models.

In light of the upcoming EU ESG legislation as well as the legal requirements of individual countries,  the recommendation for every Macedonian company is to promptly consider achieving complete ESG compliance in order to be recognized and declared as sustainable and to adhere to legal standards. This being done solely with the ultimate goal to avoid future financial burdens, reputational hazards, or potential threats of losing its business presence or cooperation with foreign markets in the near future.