Looking ahead: Implementing the EU Regulation on deforestation-free products

Combating deforestation and forest degradation constitutes an important part of the package of measures needed to comply with commitments such as those under the European Green Deal. Because of this, on 29 June 2023, the EU introduced the Regulation on deforestation-free products (EUDR). This Regulation regulates the placing and making available of products on the EU market which are produced on land that has been subject to deforestation and forest degradation. Importantly, there is a requirement of traceability of the entire supply chain of commodities including coffee, palm oil, cattle, wood, rubber and soya. Effectively, companies must not only mitigate their own negative impacts, but also the risks of non-compliance of their upstream and downstream partners. As from 30 December 2024, new rules will determine whether relevant products or commodities (1) have not been produced on land deforested or degraded after 31 December 2020, (2) have been produced in accordance with the laws of the country of production and (3) are covered by a due diligence statement made by the operator/trader. If these conditions are not met, operators and traders will be prohibited from placing or making available the in-scope products on the EU market.

Scope

The Regulation details an exhaustive list of in-scope goods. These so-called ‘relevant commodities’ are: cattle, cocoa, coffee, oil palm, rubber, soya and wood. While this list may seem rather short, ‘relevant products’ are also covered. This includes any product that contains, has been fed with or has been made with relevant commodities, significantly increasing the amount of in-scope goods.

Due diligence requirements

The Regulation imposes significant obligations on both operators and traders. An operator is any natural or legal person who, in the course of a commercial activity, places relevant products on the market or exports them. In addition to this, where a natural or legal person outside the EU places relevant products on the market, the first natural or legal person established in the EU to make these products available, will also be deemed to be an operator. A trader, on the other hand, is any person in the supply chain other than the operator who, in the course of a commercial activity, supplies a relevant product for distribution or consumption.

Operators

Prior to placing relevant products on the market or exporting them, operators must exercise due diligence with regard to all relevant products supplied by each particular supplier. There are three essential steps to be taken in this due diligence procedure:

1. Collection of information about the relevant product that demonstrates compliance with the Regulation, including:

a) The country of production;

b) Geolocations of plots of land where the commodities were produced;

c) Adequately conclusive and verifiable information that the relevant products are deforestation-free;

d) Adequately verifiable information that the relevant commodities have been produced in accordance with the relevant legislation of the country of production.

This first step will require companies to liaise with their suppliers all the way up their supply chains. Once the data is collected, the information must be submitted to the dedicated information system to be established by the Commission by 30 December 2024. This information system will contain the aforementioned due diligence statements, a registration of operators, traders and their representatives, data identifying the geolocation and the outcome of checks on due diligence statements.

2. Carrying out a risk assessment for each product to evaluate risks of non-compliance in the supply chain. This will be measured against various factors, including the risk categories set out by the Commission, as well as a risk benchmarking system.

3. Taking adequate and proportionate mitigation measures to address and avoid risks. Such measures include reporting measures and model risk management practices.

To perform these due diligence requirements, operators must also establish and keep up to date a due diligence system to ensure that the relevant products they place on the market or export comply with their respective conditions. 

Traders

Traders that are not SMEs (non-SME traders) are considered to be non-SME operators, and will thus be subject to the same obligations as non-SME operators.

Traders that are SMEs (SME traders) however, must collect and keep information relating to the relevant products they intend to make available on the market. This information includes the name, the registered name or registered trade mark, postal, email and web address of the operators/traders who have supplied the relevant products to them, and to whom they have supplied relevant products themselves. In addition, SME traders should collect and keep the reference numbers of the due diligence statements associated to those products.

Penalties

Member States will be obliged to lay down rules on penalties should infringements occur. These penalties include:

1. Fines proportionate to the environmental damage and value of the relevant commodities/products. For a legal person, the maximum amount of this fine will be at least 4% of the operator’s or trader’s total Union-wide turnover in the preceding financial year;
2. Confiscation of the concerned relevant products and of the revenues gained from transactions with the concerned relevant products;
3. Temporary exclusion from public procurement processes and access to public funding;
4. Temporary prohibition from placing, making available or exporting relevant commodities/products, or a prohibition from using the simplified due diligence process.

To this end, national authorities will be obliged to carry out regular checks (in principle without warning) on operators and traders to ensure compliance with the Regulation. Where national authorities deem that relevant products present a high risk of non-compliance, the relevant authority may even take immediate interim measures to suspend the placing or making available of the products on the market.

In addition, any natural or legal person may submit a substantiated concern to the competent authorities when they consider that an operator or trader does not comply with the Regulation. These substantiated concerns must be diligently assessed and addressed by the authorities.

When will these measures take effect?

While the Regulation will only apply from 30 December 2024, its provisions will already apply to goods produced today. Therefore, due diligence systems should be set up and implemented in due course. In this regard, companies should make the following assessment:

1. Assess the scope of application: Are your products covered by the Regulation?
2. Verify your role under the Regulation: Is your company considered an operator or a trader under the Regulation?
3. Analyse the requirements: Which requirements apply to your company? Companies should consider the requirements for their commodities and engage with their supply chains to understand how their products are produced, and foresee any possible risks of non-compliance.
4. Evaluate internal (due diligence) process: Companies should evaluate their own systems in terms of qualities and operations, and be able to benchmark those against the text of the Regulation. This will allow them to identify any gaps, where they may need to strengthen their systems, and assess existing sourcing programmes and policies. The benchmarking system provided by the Commission is expected to simplify operators’ task of classifying risks. 

The role of geolocation and the use of technology

Geolocation data provides an efficient and cost-effective way of monitoring deforestation by drawing a precise link between the commodity or product placed on the EU market and the location where it was grown. The EU offers guidance on how to collect geolocation data in an efficient and budget-friendly manner, such as generating GPS coordinates through phones and digital applications. (EU Deforestation Regulation - Publications Office of the EU)

Combining geolocation with remote monitoring satellite images is expected to boost the effectiveness of the Regulation. Ultimately, this geographic information will enable authorities to verify whether products and commodities are deforestation-free. However, discussions remain on which images and service providers will most successfully result in “adequately conclusive and verifiable” information to back up compliance and accompany the due diligence statement. Particularly for forest degradation, it will be crucial to use images showing different degrees of resolution to precise where forests have been degraded.

Implications for producers outside the EU

The Regulation guarantees that domestic and imported commodities will be measured by the same standards. Nonetheless, non-EU companies may increasingly be asked by their EU partners to provide information in order to fulfil their due diligence responsibilities. On a positive note, the Regulation will continue to support producing countries alongside other measures, by establishing forest partnerships that enhance forest governance and socio-economic opportunities for communities in sustainable supply chains. Hence, an increasing demand for sustainable products in the EU is expected to boost deforestation-free businesses around the world.

Conclusion

The EU's Regulation on deforestation-free products is a pivotal measure in the fight against deforestation. It places stringent obligations on businesses, including due diligence and risk assessments. Non-compliance may result in fines, product confiscation, and temporary exclusions from procurement processes.

Companies must promptly establish due diligence systems and assess their operations to meet the Regulation's requirements. The Regulation not only reflects a commitment to environmental sustainability but also presents opportunities for businesses to thrive in a market increasingly prioritising deforestation-free practices. Embracing these guidelines enables companies to contribute to a more sustainable future and meet the evolving demands of the global marketplace.