Political agreement reached on EU Deforestation Due Diligence Proposal

The European Parliament and Council have reached political agreement on a new Regulation aimed at minimising the risk of deforestation and forest degradation associated with products that are imported into or exported from the EU (the “Regulation”) (see Parliament press release and Council press release). The agreement was reached just one day ahead of the global biodiversity conference COP15, which is taking place in Montreal on 7–19 December 2022.

Whilst the political agreement still needs to be formally approved (see ‘Next steps’ below) and the revised text of the Regulation is not yet publicly available, the Parliament and Council press releases explain the key changes made to the Commission’s original proposal (see our previous blog post), including an agreement to extend the regime to a wider list of commodities and expand the definition of forest degradation - but no extension of the scope of the regime to financial institutions (at least not yet). This follows on from previous discussions between the Parliament and Council on the proposal (see our previous blog post).

Political Agreement

In essence, the new Regulation will make it obligatory for operators and traders who place, make available in the EU or export from the EU certain commodities to verify and issue a due diligence statement which confirms that those goods have not led to deforestation and forest degradation anywhere in the world after 31 December 2020. Companies will also have to verify in these statements that they have complied with all relevant legislation in the countries where the goods are produced, including human rights legislation and laws respecting the rights of Indigenous Peoples (including their free, prior and informed consent). Companies will also have to provide the geolocation coordinates of the plots of land from which their commodities are sourced.

The new law will apply to products from cattle, cocoa, coffee, palm oil, palm oil derivatives, rubber, charcoal, printed paper products, soya and wood, as well as products that contain, have been fed with or have been made using those commodities (such as leather, chocolate and furniture). Biodiesels are excluded.    

The European Parliament and Council agreed to a definition for deforestation based on a definition from the Food and Agriculture Organisation. As for forest degradation, the political agreement resulted in a wider, innovative definition that includes the conversion of primary forests or naturally regenerating forests into plantation forests or into other wooded land and the conversion of primary forests into planted forests.

Under the political agreement, each Member State will have to designate at least one authority in charge of performing checks on operators on the basis of a 'risk-based approach'. The European Parliament and Council have also agreed to set up a benchmarking system where the Commission will assign to each third- and EU country a level of risk related to deforestation and forest degradation. The risk category will determine the level of specific obligations for operators and member states’ national authorities to carry out inspections and controls. The Commission will have to, within 18 months of the Regulation entering into force, classify countries into low, standard or high risk, and national authorities will need to check 9% of companies importing from high risk areas, 3% for standard risk countries and 1% for low risk countries – and for high risk countries, national authorities will also have to check 9% of total volumes.

The Commission will also be required to assess whether the new regime should be extended to cover more types of forest or ecosystems (including land with high carbon storage and biodiversity value) within one and two years respectively. It will also have to review whether the regime should apply to other commodities.

Next steps

The political agreement still needs to be formally adopted by the Parliament and Council, before it can be published in the EU Official Journal of the EU and become law. Although we do not expect major changes in substance to happen in the process leading to formal adoption, it is possible that there may yet be some (hopefully only minor) tweaks to the wording of the Regulation.

The Regulation will enter into force 20 days after its publication in the Official Journal, but its main obligations will only apply 18 months after that date.

What does this mean for businesses?

The Regulation will require companies that operate in the EU to set up new systems to ensure appropriate due diligence is being performed. It is still unclear at this stage how, and if, this obligation will apply differently to SMEs (see our previous blog post).

At present, financial institutions will not be directly obliged to analyse their investments for deforestation risks (despite the Parliament wanting financial institutions to be caught by the new legislation). However, within two years of the Regulation coming into force, the Commission will be required to assess whether EU financial institutions should be obliged to only provide financial services to their customers if they assess that there is only a negligible risk that these services do not lead to deforestation. As such, there could be increased scrutiny and reporting obligations for financial institution investment in coming years.

The Regulation will provide that penalties for non-compliance should be proportionate and dissuasive and fines should be at least 4% of a company’s annual turnover in the EU. There is also a temporary exclusion from public procurement processes and from access to public funding.

This legislation is part of a broader EU legislative agenda tackling supply chains, which should also be taken into account by businesses. See for example the:

• proposal for a mandatory corporate sustainability due diligence (CSDDD) regime, where the debate is still ongoing as to whether that regime should apply to financial institutions (see our previous blog post);
• proposal for a EU ban on products made from forced labour (see our previous blog post); and
• EU Conflict Minerals Regulation (see our previous briefing).

The new deforestation law 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.