EU Deforestation Regulation and how to comply

On 6 December 2022, the European Parliament and Council announced an agreement to curb the use of products causing deforestation.

The proposed legislation will impact major economic industries and global markets, including supply chains. We explore what this means for companies and how they can prepare for mandatory compliance in within the next two years.

The Deforestation Regulation

The European Commission successfully proposed a new law in 2021. This law would make it more difficult for companies to source or import certain high-impact products which are linked to deforestation, from raw materials to finished products.

The purpose of such a law is to prevent and reduce activities that cause deforestation, recognising that many products in the EU market contribute to deforestation in their value chain.

The proposal has identified several key products and their derivatives that are high risk for deforestation, namely:

• Palm oil
• Cattle
• Soy
• Coffee
• Cocoa
• Timber
• Rubber

The new rules will apply to these commodities, with periodic review of the list to ensure it stays relevant to the intent to halt the biggest sources of deforestation.

Under the new law, consumer countries are liable to ensure Supply Chain Due Diligence Act is conducted, specifically that the commodities in question were not produced on deforested land (defined as land that has not been deforested after 31 December 2020). They must also ensure the commodity complies with all applicable laws in its country of production (for example, no illegal logging).

Due diligence requires detailed traceability mechanisms, which is one of the biggest challenges for companies. As part of the proposal, the Commission is developing a benchmark to assess the level of deforestation risk by country. This assessment will determine the degree of scrutiny on high-risk companies and subsequently, the level and strictness of obligations.

What companies will be affected?

From the original proposal made by the Commission, companies that meet the following criteria shall fall within the scope:

• They place and make the listed commodities available on the market
• They export those commodities from the EU

The proposal makes a distinction between operators and traders. Operators are those placing a product on the market, whereas traders are defined as those in the course of a commercial activity makes available in the EU market those commodities identified.

Operators have a greater responsibility to conduct due diligence and submit a due diligence statement before exporting or placing their products on the market.

Traders, on the other hand, face lighter requirements, although it boils down to size. Large traders are subject to the same obligations as operators. While small traders (SMEs) are only required to collect relevant information about their supply chain sustainability in the last five years minimum and ensure the availability of the information upon request by regulators.

This means that SMEs are let off the hook in terms of actively reporting their compliance. Large traders and operators must submit proof of compliance via an information system that will be used for this purpose.

How can companies comply?

Here is a step-by-step guide for you to understand how you and your company can comply to the deforestation regulation.

1. Evaluate the risk of deforestation in your supply chain. While doing the risk management of your supply chain, look at your entire supply chain, from raw materials to finished product. Remember that commodity-derived products are also covered, so things like leather derived from cattle and baked goods containing palm oil or soy would bind you to the law.
2. Consider location and local laws on deforestation and strength of enforcement when assessing the level of risk. Some countries have a history of deforestation or illegal logging, which will place them higher on risk. When considering local laws related to deforestation, note that the definition of deforestation in the proposal still prevails. This means that if a commodity was produced legally but on land deforested after 31 December 2020, it would be in violation of the rules.
3. Determine the exact locations where a commodity was produced. Since deforestation is tied directly to land use, the only sure indicator for monitoring is the precise identification of the land. Geographical location of the farm is a strict requirement in order to facilitate verification checks.
4. Conduct due diligence according to the outlined methods. Companies must follow a three-step due diligence process:

• Firstly, operators and larger traders must collect the relevant information (most importantly of which is the exact location coordinates so that satellite tracking may be deployed). This will involve communicating with suppliers on the necessary information, including things like the supplier’s certifications and third-party verifications.
• Secondly, they must assess the potential risk of non-compliance with this new regulation, using the information collected in the first step.
• Thirdly, if the risk of non-compliance is significant, they must take measures to mitigate, failing which they are not allowed to place their product on the market.

Those deemed less at-risk by the benchmarking system will be exempt from fulfilling the second and third steps above.

What's next?

Once adopted, the law will come into effect 12 months from the date of adoption for operators and large traders, and 24 months for SMEs.

We strongly advise operators and large traders to start preparing now, as the processes to enable traceability take time to set up. Early preparation can help you identify and address non-compliance before the law takes effect, after which you will be subject to penalties.

So the sooner you can achieve compliance, the better. SMEs are given a longer period to adjust, but getting ready now would be an early mover advantage.

How we help you

• We guide you to achieve legislative compliance with the deforestation-free law by contacting your suppliers and simplifying the collection of relevant data internally and along the whole supply chain.
• We receive information from your suppliers without jeopardising business-critical information about their supply chain from exposure, only showing one level up and one level down.
• We facilitate data exchange with suppliers and ensure that necessary and accurate information from the supply chain arrives with minimal effort.
• We conduct risk assessments of your supply chain and set up a grievance mechanism.
• We provide a centralised platform to manage all your data, pulling data from enterprise software such as ERP, HRM, EMS, etc.
• We offer insights powered by data analytics, enhancing your understanding of your supply chain, ESG performance, and reporting strength.
• We automate follow-ups to data sources, reminder emails and calculations and free up more time for you to do other things.

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