EU Regulation on Deforestation-free Supply Chains: Challenges and Opportunities

last updated on 25 October 2023 | reading time approx. 3 minutes

Every year, agricultural land continues to expand through deforestation and forest degradation. These practices have serious impacts on climate, biodiversity and the rights of indigenous peoples. The EU Regulation on Deforestation-Free Supply Chains represents an important step by the European Union (EU) to combat global deforestation and forest degradation and to protect the rights of indigenous peoples. Through the European Green Deal, the EU 2030 Biodiversity Strategy and the Farm-to-Fork Strategy, the EU has further reaffirmed its commitment to forest conservation.

Regulatory content

The regulation governs the placing on the market and making available on the EU market of raw materials that are particularly harmful to forests, such as soy, cattle, palm oil, wood, cocoa, coffee, rubber and their products. According to the requirements of the regulation, these raw materials and products must be deforestation-free and produced in accordance with the laws of the respective country of production. Deforestation-free products are those that have not been produced on land that has been deforested after December 31, 2020 (“cut-off date”). In addition, the submission of a due diligence declaration is required.

Obligations of the companies

The regulation imposes certain due diligence obligations on companies to ensure that their supply chains are deforestation-free. These include:

Information and document collection: companies must collect information on their products, including geolocation coordinates of relevant land, and keep it for at least five years. In the event of new information or justified concerns, they must inform the relevant authorities.
Risk assessment: aystematic analysis of deforestation risks in the supply chain, taking into account environmental and human rights aspects.
Risk mitigation: companies must take measures to reduce identified risks to achieve no or negligible risk.
Transparency and reporting: companies must provide transparent information on their supply chain practices and report annually on deforestation risks and actions taken. Market participants and traders who are also subject to other EU legislation on value chain due diligence (such as the Corporate Sustainability Due Diligence Directive) have the option to summarize this information in a report.

For SMEs, there is an exemption from the due diligence requirements if a due diligence declaration has already been issued for the relevant products. However, SMEs are still obliged to store information about their suppliers and customers to whom they have supplied these products and to keep this information for a period of 5 years.

Enforcement and sanctions

The regulation provides enforcement mechanisms to ensure that companies comply with the requirements. These include verification of reporting, regular unannounced inspections by competent authorities and cooperation with EU member states. Member state competent authorities will have access to relevant information about raw materials and products, such as geolocation and country of production, through a digital information system.

The EU Commission is implementing a three-tier country benchmarking system to classify countries or parts of countries as low, normal or high depending on their deforestation risk. The percentage of inspections by competent authorities is based on the country's risk level: 9% for high risk countries, 3% for normal risk countries and 1% for low risk countries. At this stage, all countries have been assigned a normal risk rating. By December 30, 2024 at the latest, the EU Commission will publish a list of countries with their corresponding risk ratings in implementing acts.

Member States have the obligation to introduce effective, proportionate and dissuasive sanctions for infringements of the Regulation. These sanctions may include fines of up to 4% of the total Union-wide turnover, exclusion from public contracts for a period of up to one year, revocation of market access authorizations, and confiscation of the products concerned or the revenue generated by them.

click to enlarge

Challenges and opportunities

Compliance with the regulation is a challenge for companies as it requires adjustments in various business areas.

Suppy chain complexity: implementing the regulation requires a thorough knowledge of one's supply chains and collaboration with suppliers. Supply chain complexity, especially in global markets, can be challenging.
Ressources: compliance with the regulation requires resources such as time, financial resources, and subject matter expertise. Companies may need to make additional investments to comply with required due diligence.
Data availability and quality: Obtaining information on the origin of raw materials along the supply chain can be difficult, especially when complex supplier networks are involved. Companies need to review their data management systems and perform the additional plausibility checks.
Regulatory adjustments: Companies need to review their supplier base and adapt codes of conduct. Non-SME market participants in particular should take into account the evolved European regulatory framework and design their processes accordingly.

Despite the challenges, the regulation also offers opportunities for companies to improve their sustainability practices and increase transparency along supply chains:

Sustainable reputation: companies that make their supply chains deforestation-free can demonstrate their commitment to environmental protection and sustainability. This can lead to a positive image and increase consumer confidence.
Competitive advantage: companies that take early action can position themselves as industry leaders and potentially attract new customers who value sustainable products.
Risk mitigation: monitoring and assessing supply chains can reduce the risk of reputational damage, legal consequences and supply chain disruptions. This can help minimize business risks.

Further steps

The regulation on deforestation-free supply chains came into force on June 29, 2023. Non-SME market participants have 18 months to implement the new rules. SMEs have an extended transition period of 24 months. The EU Commission will monitor the enforcement of the regulation and make adjustments and extensions to the scope if necessary.

Conclusion

Companies should prepare for the requirements of the regulation by reviewing their internal processes, conducting risk analyses and taking action. This is no longer new territory for large companies – under the Supply Chain Law, they are already required to fulfill human rights and environmental due diligence obligations along supply chains. The Deforestation-Free Supply Chains Regulation now goes one step further and expands the scope of due diligence to include environmental aspects and the rights of indigenous peoples.