This adds additional layers of compliance on many corporates already facing dramatic changes in the context of supply chain diligence more generally – see Regulation on deforestation-free products (europa.eu).
Why non-EU businesses need to take note
The Deforestation Regulation applies directly to operators and traders established in the EU irrespective of their size. An ‘operator’ is a person who places relevant commodities or products on, or exports them from, the EU market. A ‘trader’ is any other person in the supply chain who makes available relevant products on the EU market.
An operator or trader is considered to be “established in the EU” if its registered office or headquarters are located in the EU, or even if it has a permanent business establishment located in the EU. Many non-EU incorporated or headquartered companies will still be directly subject to the Deforestation Regulation.
Importantly, where the relevant product is placed on the EU market by operators established outside of the EU, the first EU entity making the relevant products available on the market is treated as the operator. This means that, while the Deforestation Regulation does not directly apply to non-EU entities, all relevant products, regardless of where they are manufactured, are subject to it at the point when they are sold in, or exported from, the EU.
Therefore, even where the Deforestation Regulation is not directly applicable to a non-EU business, it will have a significant indirect impact on non-EU business who supply relevant commodities or products into the EU. Customers subject to the Deforestation Regulation will need assistance and supply documentation to comply with their own due diligence obligations, which is discussed further below.
This will not be easy (or cheap), with changes likely being required across a range of business operations. Approaches to compliance will need to remain adaptable as further regulation flows through. Consequently, the Deforestation Regulation presents an additional layer of compliance and complexity for global companies who will need to consider how to develop a due diligence process that takes account of varying ESG legislation, often focussed on supply chains, being introduced across the world.
The Deforestation Regulation: an introduction
The Deforestation Regulation imposes a host of new rules relating to a broad range of commodities and certain products made from them. Commodities covered by the regulation are: cattle, cocoa, coffee, palm oil, rubber, soya and wood. Certain products deriving from these commodities are also covered by the regulation. Included are, for example, leather, pneumatic tyres and inner tubes, apparel made with vulcanised rubber, and furniture as well as paper and printed books. The full list of products in scope can be found at Annex I of the Deforestation Regulation.
From 31 December 2024 (or 30 June 2025 for small and medium-sized enterprises (“SMEs”)), these commodities or products may no longer be placed on the EU market unless they are:
- Deforestation-free (it is important to note, that the cause of deforestation does not matter and even legal deforestation is included; the cut-off date after which deforestation may no longer have taken place is 31 December 2020);
- Produced in line with the relevant legislation of the country of production (including, but not limited to, laws on human rights, anti-bribery/corruption, land use, labour rights and tax); and
- Covered by a due diligence statement (which essentially requires operators and traders to confirm that the requisite due diligence was carried out and that no risk, or only a negligible risk, of non-compliance was found).
What happens if you get this wrong? Operators and traders could face significant penalties for infringements – which could include fines of up to 4% of EU-wide turnover. Other penalties may include confiscation of non-compliant products and revenues generated from them, and temporary exclusion from public procurement processes for up to 12 months.
Due Diligence
The Regulation introduces extensive due diligence requirements. First, information and evidence needs to be collected. This includes information regarding the origin of the commodities, evidence that they are deforestation-free and that they fulfil the criterion regarding the compliance with relevant national legislation and human rights. For example, operators and traders will need to trace each commodity unit back to its plot of land and obtain evidence of the geolocation of where it was produced, as well as the date or time range of production. Companies will need to consider corruption and human rights impacts in the provenance of products that might fall outside other corruption or human due diligence processes.
Further steps include the completion of a risk assessment and if relevant the introduction of risk mitigation measures. In any event, operators and traders must have in place adequate and proportionate policies, controls and procedures to mitigate and manage such risks effectively. Again, adding layer upon layer of existing compliance processes.
In addition, (yes that’s not all!), the Deforestation Regulation requires (non-SME) operators and traders to establish a due diligence system and to publicly report, as widely as possible, including on the internet, information about their due diligence systems and the steps taken to ensure compliance with their due diligence requirements.
Practical requirements
All stages of due diligence will sooner or later pose challenges for businesses directly or indirectly impacted by the Deforestation Regulation. All business concerned with the trade of relevant commodities and products in the EU will have to deal with the collection of information and documentation about commodities and products. Accurate supply chain mapping is complex and time-consuming.
The traceability of relevant commodities and products within the supply chain will be key. However, this poses particular challenges, as many factors need to be taken into account, including:
- Different requirements depending on the commodity or location: First of all, it will be essential to clarify what data is required, as this may vary. For example, with regard to the geolocation of cattle products, all establishments associated with raising the cattle, encompassing the birthplace, farms where they were fed, grazing lands, and slaughterhouses must be geolocated. The presence of indigenous people or their duly reasoned claims regarding their use or ownership of the area should also be taken into account, as this will increase further due diligence requirements.
- Method of geodata acquisition and documentation: There are various possibilities (satellite images, or farmers can collect the geolocation of their plots of land via mobile phones) and technical questions that need to be clarified. Consideration should also be given to how the data can be verified and regularly reviewed.
- Forest monitoring: Businesses will need a functioning forest monitoring system to prove that they are deforestation-free. Deforestation-free includes the absence of forest degradation on the plot of land in question. Forest degradation means structural changes to forest cover, such as the conversion of naturally regenerating forests into plantation forests or into other wooded land. This may be more difficult to record and document. In any case, it requires very precise documentation.
- Legality requirement: As seen, the Regulation covers a very wide range of legislation. It remains to be seen what “conclusive and verifiable information” entails that meets this requirement. So far, the European Commission's FAQ only clarifies that if under the national laws farmers are legally allowed to farm and sell their product, this will likely suffice for the legality requirement regarding to national law. In any case, indications of a lack of legality should be looked into now.
- Continued connection of data to the commodity: It must be possible to assign the information to the specific commodities along the entire supply chain. If, for example, a part of a shipment is non-compliant, the non-compliant part needs to be identified and separated from the rest. If a separation or identification of the non-compliant part is not carried out, the whole shipment will be regarded as non-compliant. This requirement will affect the entire supply chain and present a major challenge. Suppliers will therefore need to be able to provide the required information and evidence and ensure that the commodities are not mixed at any step of the process with commodities of unknown origin or from areas deforested or degraded after the cut-off date.
What can businesses do now?
Businesses impacted either by the Deforestation Regulation, whether directly or indirectly, or who may be impacted by similar forthcoming supply chain legislation should consider taking the following steps:
- Risk Assessment; Consider your exposure to the Regulation as importer, producer or other supply chain participant. Also consider deforestation exposure in the context of other ESG risk. Have you done a human rights risk assessment? Or a corruption risk assessment?
- Audit, audit, and more audit: Businesses tend to have more data available internally than they think. Use this wisely and identify how to further visibility and traceability throughout the value chain. The supply chain mapping starts now.
- Invest from the start: Technology will become an (old) best friend. Identify where e.g. satellite imagery can be used.
- Consider adapting and harnessing existing processes: Use this as an opportunity to refresh third party due diligence systems, ensure supplier Codes of Conduct and other policies are fit for purpose, and tighten onboarding processes for new suppliers to cover deforestation.
- Horizon scan: Businesses can only ensure compliance with the Deforestation Regulation if they are aware of the laws applicable in the countries where their regular suppliers produce relevant products. It will be important to understand the details of the relevant land use rights, environmental protections, and forest-related rules, among others, that exist in these markets. Keeping a close eye on any EU implementing acts, guidance, and Member State local law in this area will also be key.
What’s happening in the UK ?
The EU is not alone in its approach to deforestation. The UK is also taking steps to combat deforestation through the Environment Act 2021. The Act contains provisions prohibiting ‘regulated persons’ from using forest risk commodities (e.g. cattle, cocoa, coffee, maize, palm oil, rubber and soy) or products derived from them in UK commercial activities unless relevant local laws were complied with in relation to that commodity. This would make it illegal for certain companies operating in the UK to use commodities which were grown on illegally occupied or illegally used or deforested land.
The Act also includes provisions requiring regulated persons to carry out due diligence in respect of forest risk commodities, which are similar to the due diligence requirements in the Deforestation Regulation. Such persons will be required to conduct due diligence on their supply chains, establish and implement a due diligence system, and produce an annual report on such system. Compliance with these requirements again generates the need to undertake risk assessments and introduce risk mitigation steps – with a risk of civil sanctions and fines being imposed in the event of any non-compliance.
A “regulated person” is any person who carries on commercial activities in the UK and meets any conditions relating to turnover, or a subsidiary of another undertaking which meets those conditions. This could clearly capture non-UK companies operating in the UK, including UK operating subsidiaries. The Government has not yet confirmed what turnover threshold will be used, but has indicated that it intends to capture only larger companies. The UK Government is expected to shortly issue secondary legislation which will bring into effect the existing prohibition and due diligence provisions in the Act, and will also set the turnover threshold.
