The EU has finalised reforms aimed at cutting deforestation risk, meaning traders of commodities including rubber and soy will have to comply with tougher due diligence requirements or face heavy fines.

The mandatory due diligence rules adopted by the European Council this week apply to traders and operators placing or exporting palm oil, cattle, wood, coffee, cocoa, rubber and soy, as well as some derived products, such as chocolate and furniture.

Trade finance lenders are not included in the rules despite pressure from campaign groups, though in the next two years the European Commission will assess whether financial institutions should be obliged to prevent investments that contribute to deforestation.

It will also assess whether other commodities such as maize should be included.

The expansion of agricultural land to produce commodities is a major driver of global deforestation and forest degradation, contributing to climate change and the loss of biodiversity.

Giulia Bondi, senior EU forests campaigner at non-profit Global Witness, says the law’s adoption marks “a landmark moment in the fight against global deforestation”, but notes the “worrying abstention of some member states” in approving the reforms, referring to Bulgaria, Finland, Latvia, Poland and Sweden.

The adoption of the regulation is the final step in a process that began in 2021 to toughen rules on deforestation.

Commodities produced after the cut-off date of December 31, 2020 must be “deforestation-free”, with traders required to trace commodities back to the plot of land where they were produced and carry out a risk assessment of any potential exposure to forest destruction.

SMEs will be able to rely on due diligence declarations carried out by larger traders and do not need to publicly report information about commodity sources and suppliers.

Large companies have 18 months to comply, while SMEs have two years.

Penalties include fines of up to 4% of annual turnover in the EU, as well as a temporary exclusion from public procurement processes and access to public funding.

An academic study published earlier this year highlighted the importance of zero-deforestation commitments, finding that half of cattle-driven forest clearance in the Brazilian Amazon could have been avoided if they had been implemented throughout the cattle sector.

Campaign groups have also flagged the lack of deforestation policies among financial institutions.

Although the European Parliament committee voted in July 2022 to broaden the scope of the regulation to include the banking sector, the provision was not included in the final version.

“To end the EU’s complicity in deforestation for good, we now need to cut off the money pipeline funding it – the European Commission must now deliver on its promise to deliver obligations to stop financiers bankrolling the destruction of the world’s forests,” Bondi says.

Other measures introduced by the regulation include a benchmarking system that grades countries worldwide according to the level of risk related to deforestation and forest degradation, with the risk category determining the scale of due diligence required.

The regulation is now due to be published in the official journal of the EU, entering into force 20 days later.