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A crackdown on imports linked to deforestation is prompting affected firms to start preparing now, as the EU takes a harder line on enforcing sustainability in supply chains.

The regulation on deforestation-free products will apply to palm oil, cattle, wood, coffee, cocoa, rubber and soya, as well as some derived products, such as chocolate and furniture.

Though the rules concern products entering the EU market from December 30, 2024, the goods could have been produced “on the basis of raw materials harvested months before”, Guillaume Croisant, managing associate in Linklaters’ litigation, arbitration and investigations team, tells GTR.

“As a result, some in-scope companies have already had to start gathering information and exercising due diligence as of today. We already see in-scope companies reaching out to their suppliers and sometimes seeking contractual changes centred around compliance with the EUDR [EU Deforestation-free Regulation],” Croisant says.

Operators and traders have to be able to prove these commodities do not originate from recently deforested land and have not contributed to forest degradation.

Firms will be required to collect the geolocation data of all the plots of land where the commodities are produced, which “will be cascaded down the supply chain capturing a wide range of companies both directly and indirectly”, Croisant adds.

“It is key for in-scope companies to ramp up their compliance efforts in view of the strengthened enforcement regime of the EUDR,” says James Marlow, managing associate in Linklaters’ ESG practice.

Although guidance for companies exists for its predecessor, the EU timber regulation, and the Commission has published a list of frequently asked questions for the new rules, how they will be interpreted in practice remains to be seen.

“Many uncertainties remain,” Marlow says, particularly around identifying which companies are directly subject to the new rules and so have to produce statements confirming a product is deforestation-free.

Some commodities from multiple origins, like soya, are also often mixed together in the same silo. Croisant notes that in these cases, “the European Commission takes the view that the origin of all goods that entered the silo since it was last empty must be ascertained”.

SMEs and smallholders will find compliance “particularly difficult”, Croisant adds, making it challenging for firms “with smaller businesses in their supply chains – do they support them with compliance or stop using them as suppliers?”

While each member state is responsible for setting up an authority to interpret and enforce the rules, penalties are set to be strict.

Fines can be imposed of up to 4% of total annual EU-wide turnover for the previous financial year.

All producer countries and regions will be classified by the European Commission as low, standard or high risk by the end of 2024, and national authorities are obliged to carry out checks of operators placing in-scope products on the EU market from standard or high-risk countries.

This benchmarking system drew criticism from major palm oil producers Indonesia and Malaysia at the end of last year. Malaysia’s Deputy Prime Minister and commodities minister Fadillah Yusof accused the EU of carrying out a “deliberate act…to block market access”, Reuters reported at the time.

The deforestation regulation is part of a broader push by the EU to eradicate environmental and human rights abuses in supply chains and enforce harsher penalties for non-compliance.

Earlier this month, the European Parliament and Council agreed to criminalise a wider range of abuses under the environment crime directive, including timber trafficking and the illegal recycling of polluting components of ships.

Tougher penalties will also be imposed under those new measures, including prison sentences, withdrawal of permits and exclusion from access to public funds.

 

Complying with the new rules

Big companies have 18 months from the end of June 2023 to comply with the rules, which aims to cut down on carbon emissions caused by the EU’s consumption by at least 32 million metric tonnes a year.

André Vasconcelos, global engagement lead for Trase, an initiative that maps deforestation in supply chains, tells GTR in a statement that although there is a risk of companies exporting “deforestation-free goods to Europe while supplying other markets with deforestation-linked goods”, this can be mitigated via collaboration with producing countries.

“We can see slow but growing interest in similar supply chain action in other importing markets, including the UK, US and China,” Vasconcelos says.

“Once trading companies and producing sectors put traceability systems into place to support EUDR compliance, it will lower the barriers for other jurisdictions to ask for the same level of information.”

Croisant adds that the fact that penalties must be “appropriate and proportionate” suggests the rules will be implemented using a “reasonable approach”.

Deforestation and forest degradation are drivers of both climate change and biodiversity loss, removing carbon sink capacities and reducing an area’s resilience to diseases and pests.

According to the Food and Agriculture Organization of the United Nations, 420 million hectares of forest were lost worldwide between 1990 and 2020.