[Square] Labyrinth and Supply Chain Due Diligence Act

Central Italy is home to many renowned medieval cities. Among them, Siena, a strong rival of Florence, is a UNESCO World Heritage site in its entirety. The Palazzo Pubblico, currently used as the city hall, is well known for its bell tower that exceeds 88 meters and its large wall hangings. The tapestries made in the 14th century depict a good government as one that establishes law and order, listens carefully to the opinions of its citizens, and fosters a prosperous rural society.

The concentric labyrinth in Siena Cathedral remains meaningful even today. This labyrinth, said to have been in the Knossos Palace in Greek mythology, is a place difficult to escape once entered, symbolizing the "path of hardship" and sometimes "holiness." For visitors to the cathedral, the labyrinth may also signify that life is like a maze, encouraging them to seek wisdom through faith.

Amid the ongoing ESG boom, Germany passed the Supply Chain Due Diligence Act (LkSG) last June. According to this law, large companies must prevent human rights violations and environmental pollution issues in their supply chains in advance and correct them afterward. Scheduled to take effect in January 2023, this law is expected to significantly impact not only German domestic companies but also our export companies.

What is noteworthy here is the process by which this law was created. European Union member states were required to revise their domestic laws by December 2016 according to the Non-Financial Reporting Directive (NFRD) adopted in 2014. However, in Germany, a discussion process was necessary to overcome conflicts of opinion among companies and reach consensus. While competitor countries such as the United Kingdom (2015), France (2017), and the Netherlands (2020) enacted similar domestic laws, Germany postponed the schedule several times to gather opinions and only passed the law in June this year.

Called the Supply Chain Due Diligence Act, this law requires large companies with more than 3,000 employees to △ manage risks of partner companies in the supply chain △ conduct regular risk analyses on human rights and environmental issues of suppliers △ perform inspections to prevent human rights violations and environmental regulation breaches by suppliers. From 2024, it will also apply to companies with more than 1,000 employees.

It is important to note the change in corporate awareness during the long and complex discussion process. German large companies initially thought that the introduction of this bill would increase cost burdens and weaken competitiveness because the headquarters had to manage risks of partner companies as well. However, over time, they began to see new opportunities. They judged that it would be easier to receive investments from the ESG perspective and that it would create opportunities for partner companies to export independently. This decision was possible because they also listened carefully to the opinions of partner companies.

The labyrinth also means the human ear. This is because the cochlea looks like a maze, but it also implies that balanced and attentive listening is important to overcome difficulties. Looking at the legislative process of the German Supply Chain Due Diligence Act, the government's attitude of listening to corporate opinions and finding solutions, even if it takes time, stands out. The murals and labyrinth of Siena symbolically show that a good government must listen to diverse opinions and seek wisdom.

Kim Young-woo, Research Fellow, Institute for Shared Growth

This content was produced with the assistance of AI translation services.