Deforestation Regulation: EU imposes new due diligence duties on operators and traders

The EU Deforestation Regulation (also known as EUDR) was published in the Official Journal of the EU on 9 June 2023 and comes into force on 29 June 2023.

Its main obligations will apply to all in-scope companies (other than micro-undertakings or small undertakings) from 30 December 2024, and to micro-undertakings or small undertakings from 30 June 2025.

KEY TAKEAWAYS 

The new regime in a nutshell 

The Deforestation Regulation prohibits operators and traders from placing or making available on the EU market, or exporting from the EU, certain commodities (cattle, cocoa, coffee, oil palm, rubber, soya and wood) and derived products, unless they are “deforestation-free”, have been produced in accordance with the relevant legislation of the country of production, and are covered by a due diligence statement.

The Regulation also repeals and replaces, progressively over time, the EU Timber Regulation 995/2010. It has a broader scope than the EU Timber Regulation and imposes stricter obligations, including due diligence requirements, on businesses.

This new Regulation is part of a broader EU legislative agenda tackling supply chains – which includes the proposal for a Corporate Sustainability Due Diligence Directive (CSDDD or CS3D) (see our blog post), the proposal for a EU ban on products made from forced labour (see our blog post), and the EU Conflict Minerals Regulation (see our briefing).

Which products are covered?

The Deforestation Regulation applies to cattle, cocoa, coffee, oil palm, rubber, soya and wood - as well as certain derived products (such as wood charcoal, chocolate, wood furniture, leather of cattle, printed paper, new pneumatic tyres made of rubber and selected oil palm-based derivatives such as components in personal care products).

The goods must have been produced on land that has not been subject to deforestation (or, where relevant, forest degradation) after 31 December 2020.

By 30 June 2025, the Commission will need to assess whether the list should be extended to other commodities (such as maize, and derived products like biofuels, that were part of the products that the European Parliament wanted the Regulation to cover).

Who does the Regulation apply to?

The Deforestation Regulation is applicable to any “operator” - i.e. any person who, in the course of a commercial activity, places relevant commodities or products on the EU market or exports them therefrom. If a product is placed on the EU market by a person established outside the EU, the first person established in the EU who makes those products available on the market will be considered the relevant operator. A legal person is deemed to be “established in the EU” if its registered office or central headquarters are established in the EU, but also if it merely has a permanent business establishment located in the EU.

The Regulation also applies, to a variable extent, to any “trader” - i.e. any person in the supply chain other than the operator who, in the course of a commercial activity, makes available relevant products on the EU market.

As regards online marketplaces, the Regulation specifies that it applies “regardless of whether the making available on the market takes place through traditional or online means”.

Does it apply to the financial sector?

No – following heated debates during the legislative process, the European Parliament failed to convince the Council to include financial institutions in the scope of the Regulation. Similar discussions are ongoing with respect to the scope of the CSDDD.

However, under the Deforestation Regulation, by 30 June 2025, the Commission will need to assess the need to include financial institutions in the scope of the Regulation.

What do operators and traders have to do?

In-scope products shall be “deforestation-free” and produced in accordance with the relevant legislation of the country of production (including national legislation on land use, environment, forest-related rules, third parties’ rights, labour rights, human rights, etc.).

Operators and traders will have to issue a due diligence statement which confirms that the products have not led to deforestation or forest degradation anywhere in the world, and which contains certain information prescribed by the Deforestation Regulation (such as the geolocation coordinates of the plots of land from which their commodities are sourced) and a declaration by the operator that the latter exercised due diligence and that no risk, or only a negligible risk, of deforestation was found.

By 30 December 2024, the Commission must establish and maintain an information system which contains the due diligence statements. Customs authorities, competent authorities, operators and traders will have access to this information. As regards the wider public, the Commission will provide access to the “complete anonymised datasets of the information system”.

Due diligence requirements 

The Deforestation Regulation imposes on operators and traders an obligation to carry out due diligence to ensure that the products are deforestation-free, based on a Commission-run benchmark identifying countries (within and outside the EU) as low, standard or high risk.

The Commission will need to publish the list of the countries or parts thereof, that present a low or high risk no later than 30 December 2024. That list will then be reviewed and updated as often as necessary.

The classification of countries as low, standard or high risk will have consequences on the extent of the due diligence that operators/traders will need to conduct – with more onerous due diligence obligations for commodities coming from a “high” risk country and less stringent requirements for “low” risk countries. Thus, when placing relevant products on the market or exporting them, operators/traders will not be required to fulfil their risk assessment and risk mitigation obligations where the relevant products have been produced in low risk countries (provided that the operators or traders have assessed the complexity of the supply chain, the risk of circumvention of the Deforestation Regulation and the risk of mixing with products of unknown origin or origin in high-risk or standard-risk countries or parts thereof).

This risk classification will be primarily based on the rate of deforestation, forest degradation and expansion of agriculture land for relevant commodities, as well as on the production trends of relevant commodities and products. However, the Commission may also take into consideration the laws protecting human rights, the rights of indigenous peoples, local communities and other customary tenure rights holders.

Operators and traders must also have mitigation procedures in place and take mitigating measures, when necessary, to reduce the deforestation risks to negligeable risks. However, the Regulation imposes less stringent obligations on traders that are SMEs.

For SMEs traders, their obligations consist mainly in collecting and keeping information relating to the relevant products they intend to make available on the market, in particular:

• the name, the postal address, the email address, etc. of the operators/traders who have supplied the relevant products to them; and
• the same but regarding the operators/traders to whom they have supplied the relevant products).

In other words, SMEs traders will only be able to make available relevant products on the EU market if they are in possession of that information.

Operators/traders, who are not SMEs or natural persons, must also issue a public report, on an annual basis, on their due diligence system.  

Enforcement

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 donating it to charitable or public interest purposes (or if that is not possible, disposing of it).

A range of penalties may also be applied:

• fines proportionate to the environmental damage and the value of the relevant commodities or products concerned, up to 4% of the annual turnover of the operator or trader in the EU;
• confiscation of the commodities and products, and/or of the revenue derived from them;
• temporary exclusion from public procurement processes and from access to public funding;
• temporary prohibition from placing or making available on the market or exporting relevant commodities and relevant products; and
• prohibition from exercising the simplified due diligence set out for “low risk” countries in the event of a serious infringement or of repeated infringements.

Despite not having been able to increase the fines to a minimum of at least 8% of the turnover of the operator or trader during the legislative negotiations, the European Parliament still managed to increase the amount considerably by referring to the annual turnover in the EU, whereas the Commission’s original proposal initially talked about the turnover in the Member State(s) concerned.

When will the new regime apply?

The Deforestation Regulation comes into force on 29 June 2023.

Its main obligations will apply to all in-scope companies (other than micro-undertakings or small undertakings) from 30 December 2024, and to micro-undertakings or small undertakings from 30 June 2025.

What does it mean in practice?

The new regime, which is the first of its kind in terms of strict requirements relating to deforestation due diligence and traceability, could be challenging and costly for many companies to comply with. For the time being, financial institutions are not within the scope of the Deforestation Regulation but the Commission is required to review this in due course, as well as reviewing the need to extend the regime to other types of products.  

The data gathering/traceability requirements in particular (such as the need to provide the geolocation coordinates of the plots of land from which commodities are sourced) are onerous (but not unlike the chain of custody/traceability requirements for minerals from conflict-affected and high-risk areas under the EU Conflict Minerals Regulation), especially bearing in mind how complex many global supply chains are. The Deforestation Regulation will require significant changes to the way operators and traders interact with actors in their supply chains so that they are able to demonstrate compliance with the new regime. The penalties for non-compliance are hefty and the competent authorities in each Member State will certainly have their work cut out for them in enforcing the new regime.

The Deforestation Regulation is also a potential bone of contention with some of the EU’s key trade partners. Indonesia and Malaysia (which together account for around 85% of the world’s palm oil production, a substantial amount of which is exported to the EU) are particularly concerned over the impact the new EU regime will have on small palm oil producers (who play a key role in the countries’ supply chain) unless the EU is willing to accept the Indonesian and Malaysian sustainable palm oil certification system (see FT coverage and Reuters coverage). There is also concern about the potential stigma for any countries that end up designated as “high risk”. However, the EU remains firm on the need for this new law to address the twin challenges of climate change and biodiversity loss.

It is also worth bearing in mind that many of those caught by the Deforestation Regulation could also be caught by the forthcoming CSDDD, which will impose much wider human rights and environmental due diligence requirements in the near future. The direction of travel in the EU, and increasingly in other countries as well, is one of mandatory supply chain due diligence with a particular focus on human rights and environmental risks (see our briefing on the global perspective).

In the meantime, the UK government’s plans to introduce its own new deforestation due diligence regime have been delayed but not abandoned. The UK government consulted on a deforestation due diligence regime in late 2021 (see our blog post). That consultation closed in March 2022 and the government published its response to the consultation in June 2022. The government confirmed in the Environmental Improvement Plan 2023 that it is committed to implementing these regulations “at the earliest opportunity”.

If you would like to discuss any aspect of the new regime, please reach out to the contacts on this post or your usual Linklaters contact.