EU passes sweeping due diligence rules on deforestation-free supply chains for products such as cocoa, coffee and soy
(Updated on 23 May, 2023).
An EU Regulation on the making available on the Union market as well as export from the Union of certain commodities and products associated with deforestation and forest degradation (“Deforestation Regulation”) was agreed upon by the EU legislators in December 2022. Following the green light of the European Parliament during its April plenary session, the Council has adopted the proposal on 16 May 2023. Deforestation is the conversion of forest land to agricultural space, whereas forest degradation broadly refers to structural changes to forest cover. This instrument was conceived as a response to the EU’s role in global deforestation through the import of certain products as well as the greenhouse gas emissions and loss of related biodiversity. The EU now seeks to mitigate this with the introduction of due diligence obligations for companies that seek to place in, make available in, or export from the EU a variety of commodities and products traditionally linked to deforestation.
Which commodities and products are caught? Who is concerned by the new rules?
The Regulation’s material scope is governed by a closed list of “relevant commodities”: cattle, cocoa, coffee, oil palm, soya, rubber and wood. Additionally, the Regulation targets a host of “relevant products”, i.e. those listed in Annex I to the Regulation that contain, have been fed with or have been made using these commodities, which include common products such as beef, chocolate, and books.
As to the Regulation’s personal scope, it concerns both “operators” and “traders”. The former means any natural or legal person who, in the course of a commercial activity, places relevant commodities and products on or exports them from the EU market. The latter is defined as any natural or legal person in the supply chain other than the operator who, in the course of a commercial activity, makes relevant commodities and products available on the EU market. SMEs form a special sub-category, as will be explained below. Financial institutions are excluded from the Regulation’s scope for the time being.
What are the main requirements that companies must meet?
The Regulation’s cornerstone is that relevant commodities and products may only be placed or made available on or exported outside the EU market, if they comply with the following three conditions. First, they must be “deforestation-free”, meaning, on the one hand, that they were produced on land that has not been subject to deforestation after 31 December 2020 and, on the other hand, that the harvested wood did not induce forest degradation after 31 December 2020. Secondly, they must be produced in line with the relevant legislation of the country of production. Thirdly, they must come with a due diligence statement to be submitted to the competent national authorities before the actual placing on or the export outside the EU market (see Annex II of the Regulation). In this way companies will attest that the necessary due diligence has been carried out and that no (or only a negligible) risk was found.
The Regulation also sets out a broader, three-fold due diligence obligation. Firstly, companies must collect specific information (e.g. quantity, geo-localisation coordinates of the production plots, suppliers’ contact details, etc.)to demonstrate that relevant commodities and products conform with the Regulation. Additionally, companies are tasked with conducting a risk assessment on the basis of this collected information to determine whether there is a risk that relevant commodities and products do not comply with the Regulation. An important factor in this assessment is the ‘risk rate’ – low, standard or high – that will be given to countries (or parts of countries) by the European Commission. For as long as these have not been adopted, all countries are presumed to present a standard risk. Lastly, and where the risk assessment could not demonstrate that there is no or only a negligible risk of non-compliant commodities or products, the necessary risk mitigation measures should be adopted to reach that low-risk level. These measures include, among others, requesting additional data or documents or undertaking independent audits.
Without prejudice to the above, the Regulation contains a differentiated system of obligations in the sense that not every economic actor is always subject to every due diligence rule. The situation for operators is clear as they are fully subject to the Regulation. Regarding traders, a division is made between traders that are not SMEs and traders that are SMEs. The former are treated like operators and are thus subject to the same obligations. The latter are only subject to an information collection and storage obligation relating to their suppliers and (trader) customers.
What do companies risk in case of non-compliance?
A decentralised enforcement system will be set up with designated national authorities enforcing the Regulation. This will mainly happen through (unannounced) checks of companies using a risk-based approach. Member States are also required to prescribe penalties for non-compliance on the basis of a pre-defined list, ranging from fines, confiscation of revenues and of the relevant commodities or products, to the temporary exclusion from public procurement processes. Apart from imposing penalties, national authorities will also be able to require companies to take corrective measures such as the withdrawal, recall or even destruction of the non-compliant commodity or product. While national authorities will be able to act on the basis of information that they have gathered themselves, the Regulation also foresees that enforcement can be based on “substantiated concerns” provided by third parties. The main takeaway from this is that non-compliance will be closely monitored and could come at a hefty price.
How much time do companies have to adapt to the new rules?
With both EU legislators having adopted the proposal, the regulation will enter into force 20 days after its publication in the EU Official Journal. However, an adjustment period of 18 months will be given to operators and traders to meet the new regulatory demands. Micro- and small enterprises will have 24 months to adapt.
The Deforestation Regulation is clearly an ambitious instrument but its success hinges on its enforcement (which remains a national responsibility). Companies, regardless of their size, should nevertheless start to evaluate their current supply chains for potential risks and assess whether they have sufficient expertise to deal with the Regulation’s due diligence obligations. Constant monitoring will also be necessary as the Commission will adopt the necessary delegated and implementing acts to further ‘flesh out’ the Regulation’s details.
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