Today’s entrepreneurs and investors focus not only on innovative ideas and economic parameters, but also on initiatives related to human rights, global regulations, sustainability, consumer rights, environmental impact, among others. A significant result of this transformation is undoubtedly the German Supply Chain Act (“Act”), which entered into force in Germany in 2023.
One may think that the Act concerns only German companies and that these companies are the only liable parties. In fact, however, the Act directly affects all stakeholders in these companies’ supply chains. With the enforcement of the Act, German companies have started to require their suppliers to comply with the relevant obligations.
It is important to note that the Act covers not only companies but also startups that offer them products or services. Startups that have offerings in a variety of areas, including software development and logistics and digital services, now need to comply with the obligations that companies must comply with, such as sustainability, human rights and environmental protection. Thus, the Act also requires an adaptation process in startups. This opens a new chapter for the world of entrepreneurship: an entrepreneurship model centered on legal responsibility and international compliance…
Investors and funds, especially those based in Europe, are now looking at a startup’s environmental impact (energy consumption, carbon footprint, adoption of a recycling policy), its compliance with human rights (prohibition of child labor in the supply chain, protection of workers’ rights), and the transparency and credibility of its post-investment governance structure.
The issue can be better illustrated with some examples of how the Act’s obligations are being applied to startups. Accordingly, if a startup project to provide software development support to a German car company involves a violation of human rights and/or employee rights, this violation constitutes a breach of the Act. Likewise, if packaging materials without environmental certification are sent to a German retail chain as part of a startup project, this again constitutes a violation of the Act.
In this context, investors have started to disfavor high-risk startups that do not comply with the obligations imposed by the Act. Indeed, many European funds now favor startups with ESG compliance certificates and avoid those that pose risks due to non-compliance with the Act.
Therefore, entrepreneurs that aim to expand into the European market, attract international investors or work with corporations, gain the trust of investors and turn into established market players must invest not only in innovative ideas and their economic returns, but also in the legal, ethical and sustainable aspects of their startups and comply with the obligations of the Act. Within this framework, we recommend that startups plan for (i) conducting appropriate risk analyses for their impact on the supply chain, (ii) adopting a policy for human rights and sustainability, (iii) creating a transparent reporting mechanism, and (iv) complying with the Act’s obligations, even at the ideation stage.
Senior Associate, Betül Önal Payze
