The Supply Chain Act brings SMEs into the ESG reporting obligation

The German Supply Chain Act (LkSG), the European Supply Chain Act and the EU Directive on Corporate Sustainability Reporting (CSRD), together with the EU taxonomy, lead to new reporting obligations for companies in Germany and the EU.

They affect small and medium-sized enterprises (SMEs) earlier than the respective size categories of the laws would suggest, as their smaller suppliers are also covered when the entire supply chain for large companies is recorded. And they have to provide the necessary figures as well as their products and services.

Supply Chain Act: What does it mean for SMEs?

• The LkSG will apply from 2024 to companies with 1,000 or more employees and a registered office or branch in Germany. These companies must report annually on the fulfilment of their due diligence obligations in the supply chain.
• Large companies must include their suppliers in their sustainability reporting. SMEs as suppliers will therefore be indirectly affected by the reporting obligations. Typically, responsibilities are defined here in the general supplier listing process and then also demanded. BMW has already initiated this with its suppliers in 2024 – some were very surprised.

What should SMEs do now?

To prepare, SMEs should liaise with their major customers and proactively clarify what information is required and when, as sustainability reporting is complex and cannot be produced spontaneously. An implementation project includes:

• Definition of the scope of the report
• Process recording and process optimisation
• Digitisation of the information
• Ideally automation.

The reporting structure must be kept variable, as the legal requirements are constantly changing. Over time, it is increasingly important to be able to fulfil your own disclosure obligations, which arise from the ever-increasing number of obligated companies. Internationally, there are various ESG concepts that can also apply to a German SME via the customer structure. The implementation has an impact right through to the account structure of the chart of accounts.