Grievance Mechanisms and the Supply Chain Due Diligence Act

On 25 June 2021, the German Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtengesetz - LkSG) was passed in parliament. Part of the Act is a specific requirement on grievance mechanisms within the supply chain. In this article, we discuss the importance of grievance mechanisms in the context of the new law and aspects of an effective mechanism that complies with regulations.

What is the Supply Chain Due Diligence Act?

The Supply Chain Due Diligence Act is the third supply chain-related law to be adopted in the EU. Its contemporaries are the Duty of Vigilance Law (Loi de Vigilance) in France, and the Corporate Sustainability Due Diligence Directive (CSDD) by the European Commission. The Duty of Vigilance Law is enforced since 28 March 2017. The CSDD will enter into force in 2025 or later.

The German law, which came into force on 1 January 2023, requires companies that fall within scope to take steps to identify and mitigate human rights and environmental risks within their supply chains.

The aim of this Lieferkettensorgfaltsgesetz (LkSG) is to protect the following through the imposition of social and environmental standards in the supply chain:

• Workers’ rights as outlined by the International Labour Organisation (ILO). This includes freedom of association, equal opportunity and anti-discrimination, and zero tolerance of child and forced labour,
• Human rights including safety, freedom, security, and access to basic needs,
• The state of the environment including regulations on mercury, persistent organic pollutants, and hazardous waste,
• The climate from climate change,

The LkSG is preventative by design – the emphasis is placed on demonstrating due diligence systems, practices, and procedures. One of these procedural requirements is the establishment of a public complaints' procedure to report related violations, whose procedures shall be made publicly available.

The same requirement is reflected in the French and EU laws. The Duty of Vigilance Law stipulates “an alert mechanism that collects reporting of existing or actual risks, developed in working partnership with the trade union organisations representatives of the company concerned”.

The proposed CSDD sets out the obligation to allow the submission of “complaints to the company in case of legitimate concerns regarding those potential or actual adverse impacts, including in the company’s value chain”. These are all variations of the same provision, which is to put in place a grievance mechanism.

What are grievance mechanisms?

Grievance mechanisms are channels through which issues can be raised safely and anonymously, with guaranteed protection against any form of retaliation. They are a common stipulation for corporate governance systems and a key indicator of strong governance institutions within a corporation.

They are alternatively called whistleblowing channels, which are used to sound the alarm on a breach of ethics and integrity. Due diligence processes, complaints mechanisms, grievance channels… whatever you call them, they facilitate the detection of violations that may otherwise go unreported.

Grievance mechanisms take multiple forms. A phone hotline or email address is most common as a grievance channel, freely accessible and made known to the public. There are also dedicated cloud solutions that enable digital remote access in an encrypted environment, complete with in-platform communication channels and analytics.

A proper and complete grievance mechanism should involve the following:

• Ownership of grievance processes lies with an impartial position within the company. Since violations point back to the person who committed the offence, ownership often falls to human resources. Alternatively, ownership can fall to an appointed external consultant, with escalation lines going back to the company.
• A plan of communication to publicise the availability of the grievance mechanism to stakeholders.
• An established procedure to receive complaints, assess, remediate, and prevent the same violation from reoccurring. This should include a secure platform to sustain communications while allowing for anonymity. It is common to have a standard form that the complainant fills out, with room for open-ended statements to cater for information not covered in the form. Part of the procedure should also set expectations on response times.
• Investigative processes where confidentiality is respected.
• A proper escalation process to highlight any issues that cannot be addressed by the first responder.
• Clear reporting processes of the grievance handling process and outcomes to ensure the parties involved are accountable for the fair conduct of the handling procedure.
• Documentation processes for performance tracking and reporting, including monitoring metrics such as response time, resolved cases, and repeat cases to measure the effectiveness of the complaints process.
• Safeguards to ensure the integrity of the entire grievance mechanism.

Why are grievance mechanisms important?

Grievance mechanisms help companies detect and manage risks in the supply chain. These risks are often difficult to detect without direct on-the-ground presence or constant surveillance. Setting up a grievance process gives anyone and everyone the opportunity to report something amiss, instead of relying on appointed personnel, which creates the possibility for abuse of power.

Operational-level grievance mechanisms allow stakeholders to submit complaints regarding the company’s negative human rights impact or environmental violations. They allow local communities to be heard and gain access to remedies if relevant. At the same time, grievance mechanisms should not be discounted as sources of information or advice from stakeholders.

The challenges of establishing and maintaining grievance mechanisms

The challenges related to grievance mechanisms are mainly ensuring the confidentiality of the system and holding parties accountable for the proper handling and outcome of the cases.

Grievance mechanisms are subject to manipulation or neglect, which is why the French Duty of Vigilance Law expressly states that grievance mechanisms be developed together with trade unions.

While the Supply Chain Due Diligence Act does not stipulate the same conditions, we can borrow a leaf from the French. Other than trade unions, third-party auditors can be hired to verify and legitimise a grievance process.

Digital grievance systems can also ensure the integrity of the mechanism by providing secure encryption of complaints and keeping all communications within the platform, creating transparency and a fair process.

How we help you

• We conduct risk assessments of your supply chain and set up a grievance mechanism in our encrypted system where all information and sources are tracked and recorded.
• We guide you to achieve legislative compliance with Lieferkettengesetz by communicating the grievance mechanism to your suppliers and other stakeholders.
• We receive complaints from your suppliers without jeopardising business-critical information about their supply chain from exposure, only showing one level up and one level down.
• We offer insights powered by data analytics, enhancing your understanding of your supply chain, its risks, and the effectiveness of the grievance procedure.
• We facilitate centralised communications with your suppliers and complainants, guaranteeing confidentiality and convenience in the grievance-handling process.

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