The European Union's recently instituted Deforestation Regulation mandates that entities engaged in the commerce of cattle, cocoa, coffee, oil palm, rubber, soya, wood, and derivatives thereof, undertake comprehensive due diligence throughout the value chain. This measure is designed to verify that such goods have not been procured through activities contributing to deforestation, forest degradation, or the violation of local environmental and social legislations subsequent to 31 December 2020. It is imperative for companies to presently assess the implications of the European Union Deforestation Regulation (EUDR) on their supply chain due diligence practices, in anticipation of the new requirements that will be enforced starting 30 December 2024.
On 29 June 2023, the European Union introduced a groundbreaking regulation aimed at mitigating the impact of the EU market on global deforestation and forest degradation, officially known as the "EU Deforestation Regulation" (EUDR). This initiative represents a significant step forward in the EU's commitment to environmental conservation and sustainability.
1. A wide range of products are covered, from books to beef
The EU Deforestation Regulation (EUDR) encompasses a specific set of seven commodities — namely, cattle, cocoa, coffee, palm oil , rubber, soya, and wood — along with an extensive array of derived products detailed in the regulation's annex. This includes, but is not limited to, meat products, leather, chocolate, coffee products, palm nuts, derivatives of palm oil, glycerol, products made from natural rubber, soybeans, soybean flour and oil, fuel wood, wood products, and items made from pulp and paper, including printed books. It is crucial for stakeholders to meticulously verify the inclusion of products under the EUDR by consulting the product's tariff classification according to the Combined Nomenclature.
The EUDR applies to goods produced on or after 29 June 2023 (except for timber and timber products, which are covered if produced before that date and placed on the EU market from 31 December 2027). However, it does not apply to goods produced entirely from material that has completed its lifecycle and would otherwise have been discarded as waste.
2. EUDR Non-Compliance Results in Restricted Market Access and Export Capabilities within the EU
Commencing on 30 December 2024, and extending to 30 June 2025 for micro or small enterprises, the European Union will enforce a prohibition against the placement of specified products on the EU market or their exportation from the EU, unless they meet the following criteria:
Certified as 'deforestation-free';
Produced in full compliance with the applicable legal framework of the country of production; and
Accompanied by a due diligence statement that evidences a negligible risk of non-compliance with these standards.
3. EUDR also covers legal deforestation and forest degradation
The term 'deforestation-free' is defined within the context of the EU Deforestation Regulation (EUDR) to signify that the pertinent products either contain, have been nourished with, or have been manufactured utilizing relevant commodities sourced from lands that have not been subject to conversion from forest to agricultural land, whether through human activities or otherwise, subsequent to 31 December 2020. Moreover, concerning products that incorporate or are produced using wood, the definition extends to signify that such products must be sourced from forests that have not experienced forest degradation post-31 December 2020. 'Forest degradation' is specifically identified as the transformation of primary forests or naturally regenerating forests into plantation forests or other forms of wooded land.
Crucially distinguishing itself from previous EU legislation addressing illegal logging and its trade implications—such as the EU Timber Regulation—the EUDR ambitiously addresses instances of deforestation that are deemed legal under the legislative frameworks of the production countries. This regulatory approach is informed by findings from the Forest Policy Trade and Finance Initiative, which estimated that approximately 30% of deforestation linked to commercial agriculture in tropical regions was legally sanctioned between 2013 and 2019.
4. The area of production must comply with local social and environmental laws
The EU Deforestation Regulation (EUDR) mandates that products must be produced in strict adherence to the pertinent legal framework of the country of origin. This compliance encompasses a comprehensive array of considerations regarding the legal status of the production area, including:
Land use rights, ensuring that the use of the land for production does not infringe upon established legal rights.
Environmental protection measures, to safeguard the environment from harmful production practices.
Forest-related legislations, which include forest management and biodiversity conservation efforts, especially those directly associated with wood harvesting activities.
The rights of third parties, protecting the interests and rights of other stakeholders affected by production activities.
Labour rights, ensuring fair and just treatment of all workers involved in the production process.
Human rights as protected under international law, affirming the commitment to global standards of human dignity and rights.
The principle of free, prior, and informed consent (FPIC), as outlined in the UN Declaration on the Rights of Indigenous Peoples, requiring that any production activities affecting indigenous lands or communities are only undertaken with their explicit consent.
Compliance with tax, anti-corruption, trade, and customs regulations, ensuring that production activities are conducted in a lawful and transparent manner.
This comprehensive approach ensures that products entering the EU market under the EUDR not only meet environmental standards but also uphold social, ethical, and legal principles across the board.
5. Today's production shapes tomorrow's compliance
Although the principal obligations under the EU Deforestation Regulation (EUDR) will commence on 30 December 2024, their implications extend to the marketing viability of relevant products currently in production, those being nourished with pertinent products, or those being manufactured utilizing other significant commodities. Operators are required to ascertain that products entering the EU market have not originated from land that has undergone deforestation or been exposed to forest degradation subsequent to 31 December 2020. Should these products fail to align with the EUDR's standards, they will be ineligible for introduction into the EU market—defined as making them available for the first time within the EU territory—starting from 30 December 2024. This stipulation underscores the immediate need for operators to integrate EUDR compliance into their current production and supply chain practices to ensure future market access.
6. Primary responsibility lies with the company placing the product on the EU market
Effective from 30 December 2024, companies seeking to introduce relevant products into the European Union market will be required to submit a due diligence statement to their respective national competent authority via a specialized information system, which is to be developed by the European Commission. Through the submission of this statement, companies formally accept responsibility for ensuring that their products adhere to the stipulations of the EU Deforestation Regulation (EUDR). This obligation to conduct due diligence is also incumbent upon companies that export relevant products from the EU market. Furthermore, non-EU companies may find that their EU-based clients will request the provision of essential information necessary to fulfill the due diligence requirements imposed by the EUDR, reflecting the regulation's far-reaching impact on global supply chains.
7. Due Diligence must follow the prescribed method with transparency and information along the supply chain
The EU Deforestation Regulation (EUDR) delineates a structured approach for conducting due diligence, essential for ensuring compliance. This process entails:
Collection of Comprehensive Information: Entities must gather detailed data evidencing that their products are in alignment with the EUDR's requirements. This step is pivotal for demonstrating adherence to the regulation.
Risk Assessment: For each product, a thorough risk evaluation must be conducted to determine the potential for non-compliance with the EUDR. This assessment will consider various factors, including the risk classification ('high risk', 'standard risk', or 'low risk') of the country of production, as designated by the European Commission.
Risk Mitigation Efforts: Mitigating identified risks involves conducting independent surveys or audits, procuring additional documentation, or engaging with suppliers—especially small and medium-sized enterprises (SMEs)—to enhance their capabilities and encourage investments.
Due diligence statements, which are a testament to the completion of these steps, will be made available to regulatory authorities, traders, and, to a certain extent, the general public. Moreover, companies introducing relevant products into the market are mandated to disseminate the reference numbers of these due diligence statements throughout the supply chain. This dissemination is crucial for providing all parties involved with the necessary information to demonstrate that due diligence was meticulously performed and that any identified risks were deemed negligible.
8. Expect regular checks from national authorities
The EU Deforestation Regulation (EUDR) will be rigorously implemented by designated competent authorities within the Member States. The regulation specifies comprehensive obligations for these national authorities to execute inspections (typically unannounced) of operators and traders within their jurisdictions, ensuring adherence to the EUDR's provisions. In instances where relevant products are deemed to carry a high risk of non-compliance, the competent authority is empowered to demand immediate remedial measures. Such measures may include interim actions to prevent the distribution of these products within the market.
Furthermore, in cases where products are found to be non-compliant with the EUDR, the authority will mandate that the operator or trader undertake corrective actions. This may involve rectifying any procedural non-compliance or implementing a prohibition on the sale or export of the product within the European Union, to be completed within a stipulated and reasonable timeframe. This framework underscores the EUDR's commitment to enforcing compliance through a structured and effective regulatory approach.
9. Potential fines of up to 4% of the company's EU turnover, confiscation or exclusion from public funding or contracts
Penalties for non-compliance with the EU Deforestation Regulation (EUDR) will be established within the framework of national legislation. In the future, it is anticipated that violations of the EUDR might incur criminal sanctions. However, as per the current provisions of the EUDR, penalties can encompass:
Fines that are commensurate with the environmental impact and the value of the non-compliant items. These fines are structured to escalate with subsequent violations, imposing a maximum threshold of at least 4% of the entity's EU turnover in the previous fiscal year, with the possibility of augmentation beyond the potential economic advantage derived from the infringement.
Confiscation of the implicated products or the profits accrued from these products, effectively removing the financial incentives for non-compliance.
Temporary Exclusion from participation in public procurement initiatives and eligibility for public funding, serving as a deterrent against regulatory violations.
Prohibitions for grave or recurrent violations, including a temporary ban on trading within the EU in the implicated items, or a disqualification from utilizing the simplified due diligence procedure.
This structured approach to penalties underscores a commitment to enforce the EUDR rigorously, ensuring that non-compliance does not only attract financial penalties but also operational and reputational consequences.
10. Anticipate Rigorous Oversight by Private Entities
The EU Deforestation Regulation (EUDR) facilitates a mechanism whereby private entities are empowered to present substantiated concerns to both operators and the relevant competent authorities, should they believe that certain operators or traders are failing to comply with the EUDR's mandates. Furthermore, these entities are granted the right to engage in administrative or judicial proceedings to scrutinize the legality of any decisions, actions, or omissions made by the competent authorities pursuant to the EUDR. This provision ensures a transparent and accountable framework, allowing for active participation and oversight by concerned parties in the enforcement process.