EU Deforestation Regulation (EUDR) – How to get prepared?
On May 16, 2023, the European Council adopted the EU Deforestation Regulation (EUDR), that aims to minimise the risk of deforestation and forest degradation associated with products that are placed on or exported from the EU market.
Based on the UN Food and Agriculture Organization (FAO) estimates, 420mn hectares of forest (about 10 % of the world’s remaining forests, an area larger than the EU) were converted from forests to agricultural use between 1990 and 2020. Deforestation and forest degradation are, in turn, important drivers of global warming and biodiversity loss - the two most important environmental challenges of our time.
The EU is a large consumer and trader of commodities playing a substantial part in deforestation, with consumption representing around 10% of this global figure. By curbing the import of products that contribute to deforestation, the EU can help to reduce emissions and slow the pace of climate change, as well as protect biodiversity.
What are the key aspects of this regulation?
- Due Diligence: Supplier to issue a so-called “due diligence” statement.
While no country or commodity will be banned, the regulation sets mandatory due diligence rules for all operators and traders who place, make available or export the following commodities from the EU market: palm oil, cattle, wood, coffee, cocoa, rubber and soy, as well as a number of derived products such as chocolate, furniture, printed paper and selected palm oil based derivates (used for example as components in personal care products). The Due Diligence -which can be performed by the operators themselves or by expert third parties- shall confirm the product is “deforestation-free” and include collection of relevant information and data demonstrating compliance, risk assessment measures and risk mitigation measures, as well as reporting obligations.
Cut-off date is December 31, 2020, meaning that only products that have been produced on land that has not been subject to deforestation / degradation after 31 December 2020 will be allowed on the EU market or to be exported from the EU. This cut-off date has been suggested to minimize disruption to international supply chains.
The due diligence requirements will apply starting on 4Q2024, ie. after 18 months following the adoption of the EUDR. In preparation of such deadline, companies can already put in place the following practical actions: a) analysing internal available data, b) assessing compliance of existing suppliers, c) prioritizing product categories in line with business need and products’ footprint, and d) improving the screening process for new suppliers.
- Checks on products: benchmarking system based on a three-tier system for classification of countries as low, standard or high risk.
The regulation creates a benchmarking system assigning a level of risk related to deforestation and forest degradation (low, standard or high) to countries within and outside the EU. The risk category will determine the level of specific obligations for operators and member states’ authorities to carry out inspections and controls. This will facilitate an enhanced monitoring for high-risk countries and simplified due diligence for low-risk countries. The Commission should cooperate with countries which are classified as high risk and with relevant stakeholders in order to work towards reducing the level of risk.
- Human rights considerations:
Due diligence to include assessment of adverse impacts on human rights and the rights of indigenous peoples and local communities, which will need to be consulted as part of the due diligence process.
- Enforcement measures:
The regulation includes provisions on penalties, which member states should ensure are effective, proportionate and dissuasive. Penalties include monetary fines (at least 4% of the operator’s or trader’s annual turnover in the EU), temporary exclusion from public procurement processes and from access to public funding, confiscation of the relevant products, or temporary prohibition of the products’ placement in the market.
What are the key challenges of implementing the new regulation?
The implementation of the new law is likely to face several challenges, including:
- Ensuring that companies comply with the due diligence requirements. Companies may struggle to put in place strong and practical due diligence systems, trace the origin of their products and to verify that they have been produced in compliance with local laws and regulations. Sourcing or raw material can be more challenging and costly.
- Risk of displacement of deforestation in other regions and risk of circumvention by processing the commodity in a lower-risk country with lower environmental standards and controls, thus reporting in the due diligence statement that the commodity is sourced from such low-risk country.
- Potential resistance from countries that export these products to the EU. These countries may view the law as an infringement of their sovereignty and may seek to challenge it through trade disputes or other means.
On the other hand, complying with the EUDR can be an opportunity for companies to improve their sustainability credentials, incorporate key technologies to increase evidence-based traceability (which can result in operational efficiencies), meet consumer demand for environmentally friendly products, and contribute to a more sustainable future.
Primera Purpose Advisory can assist your organization to navigate this new regulation and get prepared for a smooth implementation, including a) capacity building and training to operational teams to understand potential impact of the EUDR and how to prepare for it with practical actions, b) assisting companies with the mandatory due diligence system set up and maintenance, c) assisting investors in reviewing their portfolios and investment pipeline in the sector, and d) working upstream with the relevant supply chain stakeholders globally to strengthen the commodities traceability systems. Reach out for a tailored approach for your business and supply chain needs.