EU and UK deforestation proposals: new due diligence requirements on the cards

This time last year, I published a blog post on a proposal by the UK government to introduce a mandatory due diligence regime in relation to "forest risk commodities" (see here). Well this will now be introduced into law following the Environment Act 2021 (see Schedule 17) obtaining royal assent earlier this month. 

The EU is now also making a move to minimise the risk of deforestation and forest degradation associated with products placed on the EU market, with a proposed due diligence regime intended to be complementary to the upcoming Sustainable Corporate Governance Initiative, with its anticipated mandatory human rights and environmental impacts due diligence obligation. 

With deforestation and forest degradation as important drivers of climate change and biodiversity loss, it's not surprising that we are seeing legislative proposals emerge on this.

Some key points of the EU Proposal for a Regulation on Deforestation-Free Products to note include the following.

Which products does it apply to? 

The regime relates to the following six commodities: cattle, cocoa, coffee, palm oil, soya and wood -  as well as certain specified products fed with or made using those commodities (e.g. chocolate, furniture and leather).

What is prohibited? 

Those commodities and products can only be placed on the EU market (or exported from the EU) if they are: 

• "deforestation-free" (i.e. have not been produced on land deforested or degraded after 31 December 2020); 
• produced in accordance with local law of the country of origin; and 
• are covered by a due diligence statement - i.e. that the commodities and products were diligenced or not or only negligible risk was found (along with other information to be prescribed in an Annex).

Who does it apply to and what do they need to do? 

Those placing such products on the market or exporting them (both are classed as "Operators") must conduct due diligence in line with the prescriptive requirements of the regime, which specifies the information, documents and data to be obtained during the diligence exercise and the risk assessment and mitigation measures to be considered and undertaken. 

Operators will be required to collect the geographic coordinates of the land where the commodities they place on the market were produced. Combining geolocation with remote monitoring via satellite images is expected to boost the effectiveness of the regulation. 

Operators will need to use the information on the plots of land used for producing the commodities to analyse and evaluate the risk in the supply chain. A benchmarking system operated by the Commission will identify countries as presenting a low, standard or high risk of producing commodities or products that are not deforestation-free or in accordance with the legislation of the producer country. 

Obligations for operators and authorities will vary according to the level of risk of the country or region of production, with simplified due diligence duties for products coming from low-risk and enhanced scrutiny for high-risk areas. Operators will need to take adequate and proportionate mitigation measures. 

Not only must Operators conduct due diligence, but they must also maintain due diligence systems which they review annually (and update as required) and keep records for a period of five years. 

What are the penalties? 

The draft regulation provides for financial penalties up to a maximum of at least 4% annual turnover in the Member State(s) concerned, confiscation of commodities and products, confiscation of revenue from such commodities and products, and temporary exclusion from public procurement processes.

Drawbacks 

As with the UK regime, there are a number of drawbacks that have already been highlighted by those who wanted the regime to go further. These include:

• "Deforestation free" is defined as land not subject to deforestation after 31 December 2020.
• The regime only relates to deforestation and forest degradation. It does not prevent the import or export of commodities produced on other converted natural ecosystems such as peatlands and savannahs. 
• The limited number of commodities and products included in the scope, with rubber highlighted as a particular absentee. However, the European Commission has indicated the current list of commodities could be extended, with a review of the regime planned for two years after it is introduced.
• The regulation will not target the financial sector and investments. A similar critique was made of the UK regime, but the Commission has indicated that it believes other regimes cover off this risk (e.g. the Taxonomy Regulation and Sustainable Finance Disclosure Regulation). 
• The regime does not address human rights abuses more broadly. Again a similar critique was made of the UK regime, although at least with the EU's Sustainable Corporate Governance Initiative incoming the EU can argue that this will be covered off separately. 

Next steps 

The draft still has to be approved by the European Parliament and Council. Which means this is yet another EU regime to be keeping tabs on in 2022 - a year promising to be filled with lots more ESG-related developments. 

For further information on the EU proposal, see the Q&A and Factsheet published alongside the draft regulation.