The Supply Chain Act will come into force in Germany on 01.01.2023. Many companies will have to make adjustments in the area of risk management and supply chain auditing. The discussion focuses in particular on industrial companies, whose supply chains are often global due to globalization. But the financial sector is also more affected than many think.
Credit institutions are affected by the Supply Chain Act in four different roles:
- Banks as buyers of services
- Banks as lenders and investors
- Banks as part of the supply chain
- Banks as investment advisors
1. banks as purchasers of services
Banks also make use of services from Germany and abroad. One example of this is individual software products used by banks, which are often no longer developed by the bank's IT departments. Development often takes place offshore, for example in India or Eastern Europe, by outsourcing providers. Here, for example, it will be necessary to examine intensively what conditions prevail at the operating sites and what other services are used. The question also arises as to whether the purchased service provider uses other subcontractors.
2. banks as lenders and investors
In addition, banks and financial service providers will have to deal with the law for reputational reasons. If borrowers or customers of the bank, as well as companies in which the bank has invested, violate the Supply Chain Act, this also means non-compliance with the ESG criteria. The ESG criteria define the requirements that a financial product or financing must meet in order to be considered sustainable and socially responsible. When borrowers of the bank or companies in which the bank has invested become conspicuous for violations of the Supply Chain Act, non-compliance with sustainability requirements becomes apparent. A bank that comes to light in connection with questionable investments must justify itself to its investors and investors. This results in massive damage to the bank's image.
Companies, industries and regions where compliance with the Supply Chain Act appears to be at risk must therefore receive a risk premium.
3. banks as part of the supply chain
In some cases, credit institutions finance an entire production process. The Supply Chain Act changes their due diligence obligations in such a case.
When granting a large loan, which concerns the production as well as the procurement of individual components, the bank's due diligence obligations are extended. The loan is accompanied by special control and information possibilities. Here, the due diligence obligations also apply to the company at the end of the supply chain, since indirect influence exists. The bank must therefore deal with the entire supply chain.
In the case of loans, a credit institution will therefore have to consider factors that go beyond the purely balance sheet-related key figures. For example, the suppliers with whom a business partner works and where they are located will also be relevant. In addition, from the perspective of the institution, it will be necessary to check whether a potential borrower has fulfilled its obligations as defined by law. Since banks are regulated and regularly audited, it is imperative for them to document this internal process in a comprehensible manner.
4. banks as investment advisors
Another task of a bank is to advise its customers on investments. In doing so, it is obliged to tailor its recommendations to the risk profiles of its customers. They can choose from purely value-preserving to speculative investments.
In the future, banks will also have to pay more attention to the preferences of their customers with regard to the Supply Chain Act. A large proportion of investors attach importance to funds being invested sustainably and in terms of respect for human rights.
In future, therefore, banks will also have to take account of risks arising from the Supply Chain Act in their advisory services.
Financial services providers will be instrumental in implementing the Supply Chain Act
Overall, financial service providers will be affected by the law in a wide variety of ways. In order neither to have to pay fines nor to worsen their own reputation, it is important that banks deal with the law and their points of contact at an early stage and in detail. Clear processes for auditing suppliers should be defined and an objective assessment of customers should take place.
Overall, credit institutions are affected by the Supply Chain Act much more intensively than has been publicly perceived to date. Corresponding adjustments to banking processes are imperative.