The German Supply Chain Act and a European on top of that - the vote that was torpedoed by the FDP at the last minute. Was it helpful or not?
Dr. Tim Bauer himself comes from a family of entrepreneurs. He believes that the EU Parliament lacks an eye for SMEs. "They unduly back the perspective of corporations and large companies." Although an important topic in terms of content, the extension of the Supply Chain Directive to small and medium-sized enterprises - as stipulated by the EU - is a burden for SMEs in Germany.
But now, regardless of the political discord, regardless of the availability or lack of resources and the factor of time, the question remains: what decisions should companies make about their supply chains from now on and why? What could a quick check look like? A conversation with our new partner in Stuttgart.
Dr. Bauer, Minister of Justice Marco Buschmann (FDP) described the current form of the EU Supply Chain Act as "unreasonable for small and medium-sized companies." What do you think?
I agree with Mr. Buschmann's statement: the law will, at the very least, overburden smaller companies. In principle, however, the content of the Supply Chain Act is entirely justified. The growth of the global economy makes it necessary. Incidentally, Germany is one of the pioneers in the EU. And even if the current version is not yet as strict as the EU requirements, it is nonetheless forcing people to deal with the matter.
It has to be said that the German Supply Chain Act has been in force since January 2023 and affects larger medium-sized companies with 3,000 or more employees. And now, since the beginning of the year, it also applies to companies with 1,000 employees or more.
Exactly. The latter is currently being rolled out. It has been under discussion for years. It has been worked on for a long time. It was also dealt with intensively last year. Now that the German Supply Chain Act has only just "arrived" at companies, the European Supply Chain Act, the Corporate Sustainability Due Diligence Directive - CSDDD for short - is following directly behind. Most companies do not yet know what to expect.
Malicious tongues could make the claim that politics and businesses have had enough time to deal with ESG measures – which includes the Supply Chain Act. Ultimately, it's about protecting human rights and the environment: if you're still facing severe penalties, it's your own fault. Do you go along with this?
Conditionally. It depends on which companies you apply it to. I don't disagree if it concerns larger medium-sized companies that operate internationally and – despite having enough time and resources – have failed to look into ESG measures. But when it comes to small and medium-sized companies that are crisis-ridden and are therefore focusing on other areas, that's when I think it's too harsh to put the complete regulatory corset on them. The planned EU directive extends the scope of application from companies with 1,000 employees or more to companies with 250 employees or more. This is now leading to increasing problems between German SMEs and the EU.
More precise?
The EU Commission is looking at the feasibility of the law from the perspective of large corporations and large companies. There is a lack of pragmatism. And that is precisely the strength of SMEs: they are successful because they can act flexibly. That is its structure. And while the EU Supply Chain Act is designed for large companies, it is yet another burden that SMEs must bear in challenging times. I think that's dangerous.
What is the danger?
First and foremost, this is because medium-sized companies generally do not have the organizational resources to ensure that they can deal with the Supply Chain Act in full – and ultimately cannot finance it either. Large companies, on the other hand, have both the resources and the financial means. When it comes to dealing with and implementing the EU Supply Chain Act, this leads to a competitive advantage for large companies and a dangerous imbalance. This is a serious problem, which is why I agree with Mr. Buschmann's statement.
The FDP has now blocked the planned vote on the EU Supply Chain Act at the last minute. Was that helpful? What is your position on the debate?
The FDP has backed down, which I think leads to difficulties with such short notice.Why? Because it leads to absolute uncertainty and totally poor planning. No company currently knows what will happen in the end and what it should do. The FDP is using a vehicle here at an extremely unfortunate time. This could have been dealt with much earlier and more intensively.
You yourself come from a family of entrepreneurs and are the third generation to run a medium-sized company. How do you experience the regulations – then and now?
I often find them impractical. Looking back, I also realize that the regulations have increased significantly in recent years and are also much more extensive. It is often the case that a medium-sized company has a higher number of employees, but the majority of them work productively. In contrast, the administrative organization is lean. Everyone is busy with the operational business. After all, the company must be able to survive in the market cost-effectively. And regulations are often burdensome and challenging – especially when companies operate in a demanding industry where there is a lot of pressure and competition is fierce.
Are the ESG requirements and the Supply Chain Act actually burning issues for entrepreneurs in your region?
In fact, the issues are currently less present. The enforcement of laws is thought by many to be a distant prospect and tends to hover in the background. This is a problem that could lead to serious difficulties in the future. That's why I recommend that companies take a proactive and common-sense approach now to how they can position themselves in a clean and sustainable way.
What do you think the consequences would be if Germany were to permanently adopt an "attitude of refusal" – as DER SPIEGEL recently called it? Do you think it would have economic advantages or rather disadvantages for its economy?
I think compliance with the Supply Chain Act will give companies an advantage in global competition. It must also be said quite clearly: if dealing with regulations is manageable and SMEs can incorporate them cleanly into clear processes, then they can definitely gain a competitive advantage. However, there will be a discrepancy between the stated effort and the opportunities available to companies.
Let's stay with the competitive advantage that compliance with the Supply Chain Act can bring.
If you look at the entire ESG issue, there are two main pillars: the disclosure obligations – also known as CSRD reports – and the obligations to act, which also include the Supply Chain Act. The first pillar enables companies to be transparent on the market – whether they act sustainably or not. Among other things, this counteracts green washing, which is good and right . What is also fundamentally important here is that companies are assessed and then decide whether to cooperate. This accounts for a large part of the competitive advantage.
Who exactly is interested in ESG-compliant business practices – except perhaps potential business partners?
The financial sector, for example. There are requirements as to which business activities may and may not be invested in. Sustainability also plays a key role in EU taxonomy when it comes to subsidies. And not only there. On the subject of skills and labor shortages, companies that adhere to ESG guidelines are more attractive overall and secure their long-term success through their resources.
Regardless of the political discord, regardless of the availability or lack of resources and the factor of time: what steps would you advise companies to take in the current situation?
Lethargy is always difficult, as is blind actionism . That's why I recommend taking the first small but structured steps. Companies need to create an awareness of the risks they face – on the one hand at the regulatory level, as companies can face fines, problems with auditing and financing, among other things – and on the other hand with regard to their competitive position.
What could be some guiding questions for a quick check?
What is actually relevant to me? What are the risks to my company in terms of sustainability? Which ones should I consider and evaluate in more detail? The dual materiality analysis offers a good approach to this in order to gain an initial overview – both from an outside-in and an inside-out perspective. How is the company influenced by sustainability issues? And what impact does the business model have on the environment?
Can you give an example from an economic perspective?
Yes, what does the increasing CO2 tax mean for my company, for example? What requirements and costs do I have to expect? But also, what subsidies? If they have a negative impact on the environment, companies must assess the risks and inevitably derive measures . This topic is actually part of basic corporate management. A correct assessment is followed by the definition of one’s objectives and –- not to be forgotten – making oneself and one’s objectives transparent. This is an important signal to the outside world. Companies that fight for a sustainable position will be able to secure a long-term competitive advantage.
You primarily advise clients in the Baden-Württemberg region. What impresses you about your clients?
I think the much-used word "entrepreneurship" sums it up quite well: I see a lot of pragmatism in medium-sized companies. Action is being taken. Solutions are being found. I see an openness to new things, to change, and to driving it forward within the company.
Have you come across companies that have turned the ESG guidelines into a competitive advantage?
Yes, I got to know an entrepreneur whose maxim was to always be two steps ahead of the competition. That was his recipe for success. Against all odds, he pushed it through – sometimes even against financing partners. For example, he invested in alternative energies even before the pressure to act on ESG measures increased. He took the risk and invested a lot of money in it. Today, the company, which incidentally feels at home in a very energy-intensive industry, is thriving. I find this strength of implementation impressive. Bringing it into the organization is what ultimately makes companies successful.
What do you look at first when getting to know a company today?
Of course, this also applies to its business model, but especially to its structures and culture.
Why?
If you want to successfully implement a measure in the company, it has to fit its DNA. I am interested in the company's success factors as well as the reasons why a company finds itself in a certain situation. I need a fundamental understanding of its structures. To achieve this, I enter into extensive and trusting discussions with all central functions and parties.
You switched from the entrepreneurial to the consultant side of things in 2020. Today, you are a partner at enomyc and head the Stuttgart office. How has your own history shaped your consulting approach?
To the extent that I always have respect for the past. I often meet entrepreneurial personalities who have created something outstanding and whose companies have never known crisis. Here I ask myself the question: what approach can I use to transfer the success factors of the past into the future? What are the starting points that are anchored in the company's DNA? I concentrate on these.
Thank you for the interview, Dr. Bauer.
What questions do you have about the EU Supply Chain Act? Get in touch with us! We look forward to hearing from you.
