What is the Supply Chain Due Diligence Act, and does it impact SMEs? (Understanding ESG reporting and sustainability compliance for small and medium enterprises)
The German Supply Chain Due Diligence Act (LkSG) applies directly only to companies with 1,000 or more employees (as of 2024). While SMEs are not subject to direct obligations, they are indirectly affected: corporate clients falling within the scope of the LkSG must ensure compliance with due diligence requirements across their entire supply chain – and are therefore requesting ESG compliance data regarding human rights and environmental standards from SME suppliers. A DNK report provides a structured framework to document these standards for ESG reporting and sustainability compliance.
What is the Supply Chain Due Diligence Act (LkSG)?
The LkSG is a German federal act that came into force in January 2023 (for companies with over 3,000 employees) and was extended in January 2024 (for companies with over 1,000 employees). It mandates large enterprises to identify, assess, and mitigate human rights and environmental risks across their direct and indirect global supply chains.
Does the Supply Chain Act apply directly to SMEs?
No – SMEs with fewer than 1,000 employees do not fall directly under the scope of the LkSG. However, they are indirectly impacted: companies subject to the LkSG are required to verify that their suppliers (including SMEs) comply with the ESG standards. In practice, this translates to supplier self-assessment questionnaires, audits, and requests for comprehensive ESG reporting data.
What are customers demanding from SMEs under the Supply Chain Act?
Typical requests from LkSG-compliant corporate customers to SME suppliers include:
• Proof of fair working conditions and zero tolerance for child labour
• Documentation of environmental performance and standards (CO₂ emissions, waste, and water management)
• Self-disclosures regarding supply chain risk management systems
• Participation in verified sustainability ratings (such as EcoVadis or Ecosphere+)
How does the VS report assist with Supply Chain Act compliance?
The VS standard covers the key social and environmental KPIs required by LkSG-regulated corporate clients. Using ESG Lift, SMEs can generate a fully VS-compliant report in just 1 to 3 hours. This serves as a standardised response to supply chain inquiries, eliminating the need for expensive consulting fees or filling out redundant questionnaires for every single client request.
What is the difference between the LkSG and the CSDDD?
The EU-wide CSDDD (Corporate Sustainability Due Diligence Directive) is the European equivalent of the German LkSG. It will apply to large EU companies from 2027, although its scope was adjusted through the 2026 Omnibus Package. The German LkSG remains fully in force as national legislation.
Supply Chain Act and SMEs: Who is directly affected, how SMEs are indirectly impacted as suppliers, and how an ESG report addresses supply chain inquiries.