Germany to Make Firms Responsible for Policing Abuses by Global Suppliers

European governments are reacting to pressure from human rights and environmental lobbyists, who have pressed them to do more to force companies to police their supply chains and weed out abuses in the manufacturing of products from batteries for electric cars and smartphones, to apparel from sporting goods brands.

“From today, it is clear that high standards apply not only to German workshops and German factories,” said Finance Minister Olaf Scholz. “We are protecting workers throughout the globe-spanning supply chains.”

Under the bill, adopted by the government Wednesday and which must now be approved by parliament, any company based in Germany with 3,000 employees or more has two years to set up compliance procedures to monitor and stop abuses within its supply chains. They must also create an alert system that would allow third parties and victims to safely report any abuse.

If passed, the law would affect up to 2,500 companies. Then, in 2024, its reach would expand to any company with 1,000 or more employees, impacting a swath of German industries.

Companies with annual revenue of more than 400 million euros, equivalent to around $484 million, that fail to meet the requirements could face fines of up to 2% of annual sales. Offenders could also be excluded from public tenders for up to three years.

“For some companies, this could mean economic ruin,” said Bertram Kawlath, head of Schubert & Salzer GmbH, a midsize supplier of valves, alloys, and other technical gear for the auto and textile industries, that employs around 350 people.

Though too small to be directly affected by the bill, Mr. Kawlath fears his company and other small and midsize firms could be saddled with additional costs to provide documentation to their big customers to prove they are playing by the rules.

“They will expect of me that I document that I can rule out any human rights violations and at the end of the day, I have all of this bureaucracy that I have to take care of,” he said.

The bill specifically cites issues, such as the alleged use of child labor in Asian textile factories, that have plagued fashion and sporting goods makers. It also cites allegations of slave and child labor in illegal mines that extract materials such as cobalt used by the German auto industry in batteries for electric vehicles.

German companies warned that national legislation and additional bureaucracy would put them at a competitive disadvantage.

“Any legislation should be multilateral and at the very least take place at the European level in order to effectively address the global challenges of the textile industry,” said Stefan Pursche, spokesman for Adidas AG , the German sporting goods company.

The chief executive of printing machine producer Heidelberger Druckmaschinen AG called the bill unworkable and a move by the government to shift responsibility for regulation onto the shoulders of companies.

“This law will bring nothing but bureaucracy because we will not be able to see what is happening all the way down at the end of the supply chains,” Rainer Hundsdörfer said.

Human rights groups and opposition politicians in favor of supply chain regulation were also disappointed with a bill they said had been significantly watered down by industry lobbyists. They said previous wording making companies financially liable for abuses had been weakened and a provision that would have allowed victims to sue companies had been removed.

“Since there is no civil liability foreseen, the law has no teeth,” Uwe Kekeritz, a Green Party lawmaker, said.

Write to William Boston at [email protected]