By Allen Campbell, JD, MBA
This is another blog post in our series on Value Chain Sustainability.
Once again leveraging its position as the world’s third largest economy, the EU continues to lead the world in protecting the global environment. The EU Deforestation Regulation (EUDR), which became effective on June 29, 2023, will impact agricultural, forestry and business practices around the world. Unless prescribed standards are met, the law will preclude access to (and exports from) the EU of products that have long been associated with deforestation: cocoa, coffee, wood, palm oil, rubber and cattle, and specified derivatives thereof, as well as specified products made using these commodities. Companies placing or exporting the affected products in or from the EU market will have to conduct due diligence to confirm that the products have not been sourced from land which was deforested or degraded after December 31, 2020. Companies will also have to verify that these products are compliant with relevant legislation of the country of production, including respect for human rights, and the rights of affected indigenous people.
From December 30, 2024 (or June 30, 2025 for micro or small businesses), it will be illegal to place “relevant products” on the EU market, or export them from the EU, unless they are:
- “deforestation-free”;
- produced in accordance with the relevant legislation of the country of production; and
- covered by a due diligence statement indicating no more than a negligible risk of non-compliance.
The list of “relevant products” is contained in Annex 1 to the law. The list contains products that would seem obvious to most people, such as leather and chocolate candy. Surprisingly, however, other likely products, such as leather shoes and cosmetics containing palm oil, are not on the list, at least not at this time.
This Regulation is part of the EU Green Deal and the EU’s stated desire to protect the world’s forests. For good reason: deforestation causes huge volumes of greenhouse gas emissions and loss of biodiversity. As noted in the preamble to the law, “Agricultural expansion drives almost 90 % of global deforestation, with more than half of forest loss being due to conversion of forest into cropland, whereas livestock grazing is responsible for almost 40 % of forest loss.”
The EUDR is highly unusual in presuming that products are con-compliant unless shown to be “deforestation-free”. The burden of proof is on the importer or exporter to prove compliance. Any operator or trader who places these commodities on the EU market, or exports from it, must be able to prove that the products have not originated from recently deforested land or to have contributed to forest degradation.
A product is defined to be “deforestation-free” when the product it, or its ingredients or its derivatives were not produced on land subject to deforestation or forest degradation after the cut-off date of December 31, 2020.
As is the case under other EU Value Chain Sustainability laws, non-EU companies can expect to be asked by their customers to provide necessary information to comply with their due diligence obligations under the EUDR.
Under the Regulation, diligence should be conducted as follows:
- collect detailed information that demonstrates the products comply with the EUDR;
- carry out a risk assessment in relation to each product to ascertain the risk of non-compliance with the EUDR. This will reflect numerous factors including the risk category of the country of production (‘high risk’, ‘standard risk’, or ‘low risk’, to be determined by the European Commission); and
- mitigate risks by carrying out independent surveys/ audits, gathering additional documentation, or working with suppliers (particularly SMEs) through capacity building and investments.
Due diligence statements will be accessible by authorities, traders, and to a more limited extent the general public. Companies that place a relevant product on the market also have an obligation to communicate the reference numbers of due diligence statements down the supply chain all information necessary to demonstrate that due diligence was performed, and that no more than a negligible risk was identified.
The EUDR will be enforced by competent authorities in the Member States. The Regulation provides competent national authorities to conduct checks – perhaps without warning – of operators and traders. In the case of products that carry a high risk of non-compliance, the competent authority may require immediate remedial action (e.g., interim measures to prevent those products entering the market). Where relevant products are non-compliant, the competent authority will require the operator/trader to take corrective action, such as a correction of a non-compliance, or a ban on the item being sold in the EU or exported).
Private parties will be allowed to submit substantiated concerns to companies and competent authorities when they believe non-compliance has occurred. Such parties must also be entitled to use administrative or judicial procedures to review the legality of the decisions, acts or omissions of the competent authorities. It is not clear whether this creates a private right of action.
This law has teeth. Penalties for non-compliance will be provided for under Member State laws. It is intended that breaches of the EUDR will eventually lead to criminal penalties, but under the Regulation itself, penalties may include:
- Fines proportionate to the environmental damage and value of the items to a maximum of at least 4% of EU turnover in the preceding year, which may be increased to exceed the potential economic benefit;
- Confiscation of the covered products or confiscation of the revenues gained from the items;
- Temporary exclusion from public procurement processes and public funding; and
- For serious or repeated infringements, temporary prohibition from dealing in the EU in those items, or a prohibition from using the simplified due diligence process.
The authorities in Member States are responsible for enforcing the Regulation through inspections and sanctions. To support Member States, an online system will be set up to facilitate the exchange of information on products placed on the EU market.
Compliance will likely be challenging and expensive. What should your company do now?
Determine if it is affected by the EUDR, and if so:
- Analyze your internal data to enable visibility and traceability throughout your value chains.
- Assess the compliance of your existing suppliers.
- Identify technologies and partners to be used in connection with traceability.
- Create or update a supplier code of conduct.
- Review and probably update your screening and onboarding processes for new suppliers.