EU Parliament adopts regulation on deforestation-free products in the supply chain
The European Parliament approved on April 19, 2023 the Regulation on deforestation-free products (Deforestation Regulation) [1]. Tracing back and geolocating the origin of commodities such as cattle, coffee, cacao, palm-oil, soya, wood, and rubber will soon become mandatory for European companies trying to place or make available such commodities or resulting products (e.g. leather, chocolate, furniture or printed paper products) on the European Market or export them to third countries. Novel technologies such as AI-based satellite remote sensing technology could therefore soon play a larger role both for European competent authorities who need to control such activities, and for companies themselves who need to submit a due diligence statement to the former. The new regulation requires a shift from solely focusing on the business partner as entity towards due diligence requirements for the respective supplied products.
Global Forest are on the decline. To be precise: 10 million hectares a year which is equivalent to the size of Portugal. With this warning, Christophe Hansen, conservative European People’s Party MEP and rapporteur, opened the debate on Monday (17, April) in the European Parliament and urged his colleagues to vote for the new European Union Deforestation-Free Products Regulation (EUDR) [2].
The new regulation, which also repeals the previous timber trading regulation (EC Regulation 995/2010) is a major milestone not only in the fight against climate change and biodiversity loss, but also against the global machinery of organized crime. According to Interpol, illegal logging generates approximately 50 billion dollars annually and is, next to drug and arms trafficking, meanwhile becoming one of the most lucrative opportunities for organized illicit networks [3]. Just recently, a new ICIJ-led cross-border investigation exposed how the illegal logging industry is often covered by environmental auditing firms who “ignore or fail to recognize glaring environmental damage caused by loggers and other clients whose practices they certify as sustainable” [4].
With the new regulation, the responsibility to ensure that products are both deforestation free and have not contributed to forest degradation, has now been pushed back to European operators and traders. The legislation clearly sets out a prohibition for any of the relevant products
- that have not been produced “deforestation free”, which means, they have not been produced on plots of land that have contributed to deforestation or forest degradation after December 31, 2020;
- that have not been produced in accordance with the respective national legislation in the country of production;
- that are not covered by a due diligence statement.
Thereby, the due diligence statement shall be the result of a preceding due diligence process of relevant products that include information collection, a risk assessment, and the provision of resulting mitigation measures. The most striking part of these requirements is that operators and traders not only need to identify the country of production as part of the information collection, but also the specific geolocation of individual plots of land. For cattle, this means the identification of any establishments where the cattle were kept.
Certainly, in a globalized world with companies often having thousands of suppliers around the world, the implementation of such regulatory requirements will be a challenge. Especially, the differentiation of original elements in processed products or the traceability of mixed products transported in one container are just examples of potential obstacles going forward.
The Deforestation Regulation must now be formally approved by the Council. It will then be published in the Official Journal of the EU and 20 days later it will enter into force. Within 18 months of the Regulation coming into force, the ban and the new due diligence requirements will take effect, i.e. presumably by the end of 2024. Affected operators, traders and importers therefore have only one and a half years left to ensure compliance with the new regulatory framework.
The European Commission will issue further implementing acts by then and classify individual countries or parts thereof into three risk classes (low, standard, and high). A simplified due diligence procedure will then apply to products from low-risk countries. At the same time, the risk level of the respective country will determine the future regulatory inspection frequency.
Companies that fail to comply with these new requirements risk confiscation of the products in question and the revenue generated from illegal trade, as well as a ban on commercial activity on the EU market. They also face a fine of at least 4% of their total annual turnover in the EU.
Pohlmann & Company will soon present and discuss the specifics of the Deforestation Regulation in more detail in its upcoming ESG/Compliance Lunch Break Out Series.
Link to reguation