In Short
The Situation: The European Union ("EU") has adopted a new regulation designed to tackle deforestation and forest degradation in the EU and globally by preventing European citizens from buying, using, and consuming products that are not deforestation-free.
The Result: Once the new regulation enters into force—there is a short grace period of 18 months for larger companies and 24 months for smaller companies—covered companies need to ensure that the covered products that they import and export into and out of the EU are deforestation-free, have been produced in accordance with applicable laws, and are covered by a specific due diligence statement.
Looking Ahead: Companies that will need to comply with the new regulation are well-advised looking now to see if they have the necessary procedures in place to avoid liability under the new regulation. At the same time, they need to ensure that any action they perform in this context does not conflict with other EU-based laws, such as those based on the Unfair Trading Practices Directive ("UTP-Directive").
The EU Deforestation Regulation
Following the political agreement between the European Commission, the European Council, and European Parliament in December 2022, the European Council formally adopted the EU Deforestation Regulation ("Deforestation Regulation") on May 16, 2023 (the adopted text was already published on April 19, 2023). Once the Deforestation Regulation has been published in the Official Journal, it will enter into force 20 days later. This is expected to take place in mid-2023.
The Deforestation Regulation applies to cattle, cocoa, coffee, palm oil, rubber, soy, and wood, as well as most of the products that contain, have been fed with, or have been made using these commodities, which are defined in greater detail in an annex to it ("Covered Products"). After it enters into force, the Deforestation Regulation will apply to large companies 18 months later (24 months for small companies). Given the wide-ranging obligations imposed by the Deforestation Regulation, companies are well-advised to check whether they have procedures in place that will allow them to import and export Covered Products into and out of the EU.
Provisions of the Regulation
While the Deforestation Regulation provides for certain exemptions for smaller companies, its rules apply in principle to everyone who pursues a commercial activity and buys or sells Covered Products in the EU. In order to be imported into or exported out of the EU, Covered Products need to be (i) "deforestation-free"; (ii) produced in accordance with the "law of the country of production"; and (iii) covered by a "due diligence statement." Taking each of these in turn:
- "Deforestation-free" means that the Covered Products only contain, have been fed with, or have been made using relevant commodities that were produced on land that has not been deforested after the end of 2020 (a special rule applies to wood).
- "Law of the country of production" not only includes local laws but also human rights protected under international law and the principle of free prior and informed consent, as set out in the United Nations Declaration on the Rights on Indigenous Peoples.
- The "due diligence statement" that needs to be submitted for the Covered Products is to confirm that due diligence in accordance with the Deforestation Regulation has been performed and has concluded that no or only a negligible risk was found that the products are not deforestation-free and have not been produced in accordance with the relevant legislation of the country of production. The due diligence needs to take into account (i) the presence of Indigenous Peoples in the relevant area of production; (ii) the consultation and the cooperation with such Peoples; and (iii) the existence of claims of ownership of such Peoples. Due diligence statements need to be submitted to and will be reviewed by the competent authorities appointed by EU Member States. Violations can be punished by fines of up to 4% of the companies' EU-wide turnover. EU Member States also need to facilitate civil enforcement.
Implementation Challenges for Businesses
While it is complex enough to establish the necessary processes to ensure compliance with the Deforestation Regulation in the future, larger buyers of agri-food products also will need to be careful not to come into conflict with other European Member State laws, in particular based on the UTP-Directive, which had to be transposed by May 1, 2021.
The UTP-Directive prohibits, among other things, not paying a supplier of agri-food products within certain time limits, the cancellation of orders of perishable products, or requiring payments from the supplier that are not related to the sale of agri-food products. These rules could, for instance, block a buyer of Covered Products from not paying or sending back products if the buyer learned only later on that the due diligence statement could not be issued to the competent authority.
A German retailer recently experienced how the UTP-Directive may constitute a problem for implementing measures to protect forests abroad. The retailer had imposed the requirement on its soy suppliers to attest that their soy is deforestation-free. In case suppliers have not been able to do so, they had to buy "credits" to compensate for the use of non-deforestation-free soy. When the German authority responsible for the enforcement of the law based on the UTP-Directive learned about this, it intervened to protect the foreign suppliers and required the retailer to change its procurement policy. The authority considered the retailer's requirement that soy suppliers had to buy credits in case they could not confirm that their soy is deforestation-free—a violation of the prohibition not to require a supplier of agri-food products to bear costs that are not specifically related to the sale of the product sold.
Three Key Takeaways
- The Deforestation Regulation establishes a highly complex mechanism to ensure that only deforestation-free products enter or leave the EU. It will affect every commercial buyer or seller of Covered Products in—based on the current timeline—about two years' time.
- Ensuring compliance with the Deforestation Regulation will be very challenging and will be exacerbated by the UTP-Directive's limits on the way to deal with suppliers of Covered Products, in case this directive applies.
- All buyers and sellers of Covered Products should consider whether they have the necessary procedures in place to avoid liability.
