EU Deforestation Proposal: next steps

On 13 September 2022, the European Parliament  adopted its position (the "Parliament Position”) regarding the Proposal for a Regulation on Deforestation-Free Products (the “Proposal”), published by the European Commission  on 11 November 2021 (see our previous alert). The Council of the EU had adopted its general approach on the Proposal on 28 June 2022 (the “Council Approach”). 

The first trilogue was held last week and it is hoped that the EU can reach political agreement on the Proposal before the COP15 on Biodiversity in December in Montreal.

As set out below, although the EU institutions are broadly aligned, the Parliament and the Council have suggested a number of changes to the Proposal. The Parliament, in particular, wants an enlarged scope of application (which would include financial institutions) and an extended range of penalties. 

Context

The Proposal requires due diligence to be carried out before certain commodities can be placed on, or exported from, the EU market, to confirm that the commodity (and certain derived products) are “deforestation-free” and conform with the relevant legislation of the country of production.

It is part of a broader EU legislative agenda tackling supply chains – such as the proposal for a mandatory corporate sustainable due diligence regime (see our previous alert), the proposal for a EU ban on products made from forced labour (see our previous blog post), and the EU Conflict Minerals Regulation (see our previous briefing). The Proposal repeals the EU Timber Regulation 995/2010, which prohibits the placing of illegally harvested timber and timber products on the EU market and lays down obligations for operators placing timber on the market for the first time.

Scope of application

Relevant commodities and derived products

The Proposal covers six listed commodities: cattle, cocoa, coffee, palm oil, soya and wood – as well as certain specified derived products (such as chocolate, furniture and leather). 

The Council Approach retains the same six commodities but proposes to extend the list of derived products, for instance to wood charcoal or printed paper products. The Parliament Position goes one step further, by including swine, sheep and goats, poultry, maize and rubber.

The three institutions acknowledge the importance of re-assessing the scope of this Proposal two years after its entry into force to review whether it should be extended to other commodities, such as rubber (Council), and derived products such as sugar cane, ethanol and mining products (Parliament).

Operators and traders

The Proposal is applicable to any 'operator', defined as any person who, in the course of a commercial activity, places relevant commodities and products on the EU market or exports them from the EU. If a person established outside the EU places on the EU market any of the in-scope commodities and products, the first person established in the EU who buys or takes possession of them would be considered the relevant ‘operator’ .

The Proposal also covers, to a variable extent, any ‘trader’, defined as any person in the supply chain other than the operator who makes available said commodities or products on the EU market.

While the Council agrees with this scope of application, the Parliament suggests more clarity and the addition of a specific rule for online marketplaces, according to which they would have to comply with the obligations for products and commodities for which they facilitate the sale where no manufacturer or importer is established in the EU.

Financial sector

A controversial element is the application of the Proposal to financial institutions. The Commission’s Proposal made it clear that it would not apply to the financial sector. However, the Parliament Position sets out rules applicable to financial institutions headquartered or operating in the EU and which provide financial services to persons whose economic activities consist of or are linked to the production, supply, placing on, or export from the EU of the relevant commodities and products. In-scope financial institutions would only be able to provide financial services to customers after having assessed that there would be no more than a negligeable risk that the financial services support the deforestation activities of the customers.

Operators’ duties

Placing/making available on the market and export ban

The Proposal authorises the placing/making available on the EU market and export of deforestation-free products, produced in accordance with relevant legislation of the country of production, if an appropriate due diligence assessment did not identify any non-negligeable deforestation risks. Here again, the three EU institutions have different views.

On the cut-off date for deforestation-free products - the Proposal referred to relevant commodities and products produced on land that has not been subject to deforestation after 31 December 2020. However, the Council is calling for that date to be 31 December 2021, while the Parliament proposes 31 December 2019. The Parliament also wants to include the condition that those products have not contributed to forest conversion after said date.

On the relevant legislation to be complied with - the Proposal refers to the rules of the country of production on land use, environment, trade and customs. The Council keeps the same wording ‘relevant legislation of the country of production’, but enlarges it to include human rights as well as relevant tax and anti-corruption rules. Although the Parliament opts for another appellation (“relevant laws and standards), it somewhat agrees with the Council by extending it to human rights protected under international law. However, no express reference to tax and anti-corruption rules is made by the Parliament.

Due diligence

The Proposal imposes on operators and traders an obligation to carry out appropriate due diligence, based on a Commission-run benchmark identifying countries as low risk (for which only simplified due diligence is required), standard risk or high risk. Operators and traders must also have mitigation procedures in place and take mitigating measures, when necessary, to reduce the risks to negligeable risks.

The Commission’s Proposal foresees the watering down of the obligations for traders that are SMEs, while the Council wants this to apply to all traders, not only SMEs.

As for the operators’ due diligence, the Parliament considers that the Commission-run benchmark should not be limited to the deforestation and forest degradation risk, but should also cover the risk of violations of human and labour rights. The Parliament also wants the rate of forest conversion to be taken into account in the risk assessment.

The Parliament considers that in-scope financial institutions should also be subject to a due diligence duty. This entails a duty to collect up-to-date information on customers’ activities. If a risk assessment establishes that provision of financial services creates a ‘non-negligeable risk’ of non-compliance, the financial institution concerned shall not provide the services.

Enforcement

Checks on operators and traders

Under the Commission’s Proposal, each Member State would have to designate at least one national competent authority in charge of performing checks on operators. When carrying out the checks, the national competent authorities would have to establish a plan based on a 'risk-based approach' (per country or geographical area, the operator’s history, etc.). Based on this plan, national competent authorities must identify the operators and traders to be checked and identify relevant commodities and products which call for immediate action and suspend immediately their placing on the EU market (for a maximum of 3 working days). For traders, checks would only include the examination of documentation and records that demonstrate compliance and, where appropriate, on-spot checks (such as audits).

National competent authorities can require non-complying operators and traders to adopt corrective actions, which range from rectifying any formal non-compliance to withdrawing or recalling the relevant commodity or product immediately or even destroying it or donating it to charitable or public interest purposes.

The Council wants the risk-based analysis to consider how complex and lengthy the supply chain is and the risk of circumvention. Traders would be subject to the same checks (except for traders that are SMEs and would benefit from the less stringent version of the checks). Although the Parliament follows the Council’s approach, it also makes it clear that records of checks shall constitute environmental information under the meaning of Directive 2003/4/EC on public access to environmental information, and be made available upon request.

Under the Proposal, any person is entitled to submit information to the national competent authorities if they believe that an operator or a trader has failed to comply with the requirements in the Proposal.

Penalties

Both the Commission and the Council agree on the range of penalties to be applied:

• fines proportionate to the environmental damage and the value of the relevant commodities or products concerned and of an amount of at least 4% of the annual turnover of the operator or trader in the Member State(s) concerned;
• confiscation of the commodities and products, and/or of the revenue derived from them; and
• temporary exclusion from public procurement (although the Council want this capped at 12 months).

The Parliament, on the other hand, wants fines of at least 8% of the operator’s or trader’s annual turnover in the EU. It has also amended the list of penalties to include, for instance, an obligation to restore the environment and an obligation to compensate for damage done. It extends the exclusion from public procurement processes to include access to public funding more generally and provides the possibility to impose a prohibition from placing or making available relevant commodities and products on the EU market, or exporting them, in the event of a serious infringement or of repeated infringements.

It will be interesting to see if the Proposal for a Directive on the protection of the environment through criminal law, published on 15 December 2021 will pick this up (see our previous alert).

Next steps

As the Parliament and the Council have now defined their respective positions, they will now form so-called ‘trilogues’ to try and reach a political agreement before the two institutions can formally adopt the Regulation. Trilogues are an informal procedure with no pre-set timeline. From experience, they tend to last on average 3 to 6 months. The first trilogue took place last week and the parties are hoping to be able to reach political agreement on the Proposal before COP15 on Biodiversity on 7-19 December in Montreal.

That being said, the political agreement would still need to be formally endorsed by the co-legislators and will depend on several factors, such as political urgency. Entry into force of the Regulation would therefore take approximately another 18 months. 

Once adopted, the main obligations imposed by the Proposal would then apply 12 months (or 18 months as per the Council Approach) from its entry into force, except for microenterprises (and for SMEs as per the Parliament Position) for which it would only apply 24 months after the entry into force.