On 19 April 2023, the European Parliament adopted the final text of a new EU Regulation aimed at tackling deforestation and forest degradation (the “Deforestation Regulation”) requiring companies to undertake due diligence into the source of a wide range of commodities, including cattle, cocoa, coffee, palm-oil, rubber, soya and wood, to ensure that they have not been obtained as a result of deforestation. Once in force, obligated will have 18 months to implement the new rules.
The Deforestation Regulation forms part of the European Green Deal initiative and aims to ensure that EU consumption does not contribute to global deforestation and forest degradation arising from agricultural expansion linked to the relevant commodities.
The driving force for the Deforestation Regulation is the current alarming rate of deforestation and degradation. According to EU sources, from 1990 to 2020 the world has lost 420 million hectares of forest, with EU consumption estimated as causing 10% of these losses. This Regulation aims to guarantee EU consumers that products bought on the EU market do not contribute to global deforestation and forest degradation.
Scope of the Regulation
The Deforestation Regulation will repeal and replace the existing due diligence regime created by the EU Timber Regulation (995/2010/EU) which applied to timber and certain types of timber products. The new Regulation is not limited to timber and so will have a much broader scope, capturing commodities associated with deforestation, such as cattle, cocoa, coffee, palm-oil, rubber, soya and wood, as well as derived products including leather, chocolate, furniture and palm-oil derivatives. Further, the new Regulation will enhance and expand on the existing due diligence framework that previously applied to timber products.
Businesses placing relevant products on the EU market (or exporting them) will be required to ensure that products are ‘deforestation-free’. This means that products must be produced on land that has neither been deforested after the 31 December 2020 cut-off date, nor has seen primary and naturally growing forests converted into plantations. Further, products must have been produced in compliance with all applicable and relevant laws in force in the country of production.
Importantly, businesses will be required to submit to the authorities, before placing on the market or exporting, a due diligence statement confirming that the relevant checks have been undertaken and identifying the specific geolocation of all plots of land where the relevant commodities were produced to help facilitate compliance checks.
The extent of the due diligence checks required will be based on a benchmarking system to be adopted by the EU Commission that will assess countries (or parts thereof) to determine the level of risk of deforestation and forest degradation.
Penalties will be established at Member State level with non-compliance with the Regulation potentially leading to products being confiscated and access being denied to the EU market. Fines can also be issued, with the maximum fine corresponding to 4% of total annual turnover in the EU.
The European Parliament’s adoption follows the announcement that a political agreement on the text had been reached between the European Parliament and the Council on the Regulation in December 2022. The text now has to be formally endorsed by the EU Council. It will then be published in the Official Journal and enter into force 20 days later. Once in force, businesses will have 18 months to implement the new rules meaning that requirements will likely be applicable from early 2025.
The impact of the Deforestation Regulation will primarily be felt by businesses wanting to place relevant products on the EU market and export them, with the key sectors affected by the Regulation including retail, food/beverage, apparel, automotive, life-sciences, biofuels, paints and coatings, and cosmetics.
To comply with the Regulation, businesses will need to ensure that they have due diligence processes in place that include information gathering, risk assessment, and risk mitigation measures. Businesses will also need to put in place appropriate processes to ensure that signed due diligence statements can be prepared in respect of all shipments.
This Regulation sits alongside a growing number of regulations and proposals in the EU aimed at requiring companies to take greater responsibility for the impact on human rights and the environment of their extended supply or value chains, including the Commission’s proposed Corporate Sustainability Due Diligence Directive and Regulation Prohibiting Products made with Forced Labour.
The UK has also committed to addressing deforestation with the adoption of the “Forest Risk Commodities” regime under the Environment Act 2021. Similar to the EU Regulation, the Act aims to tackle deforestation and protect forests by prohibiting certain commodities connected with illegal deforestation and requiring businesses to conduct robust due diligence. However, secondary legislation to implement these requirements in the UK still needs to be adopted.