Deforestation-free Supply Chains

On June 29, 2023, the EU Regulation on deforestation-free supply chains (Regulation (EU) 2023/1115 on deforestation-free products, or EUDR) came into effect with little public attention. Initially set to apply to many companies following an 18-month transition period on December 30, 2024, the European Commission has since proposed a 12-month delay, pending expected approval from the EU Parliament. Companies that have not yet implemented the EUDR requirements should use this “grace period” effectively. But what is the EUDR? What purposes does it serve, and what obligations will companies face in the future?

Overview:

1. Objective and Challenges: Global Forest Protection as a Management Task

Deforestation is the process of converting sustainable and diverse forest areas (primary or regenerating forests) into agricultural land. The permanent loss of these natural reserves has substantial environmental, biodiversity, and climate impacts. The deforestation of the Amazon rainforest is a well-known example of the irreversible destruction of ancient forests. The EU countries are also accountable due to their demand for products linked to deforestation, leading the WWF to call the EU the “runner-up in global forest destruction.” Main causes of deforestation include:

• Agriculture: Monocultures like soy, cocoa, rubber, palm oil, and coffee often lead to the clearing of sustainable forest areas.

• Livestock farming: Grazing areas for cattle significantly contribute to deforestation.

• Logging: Commercial wood harvesting for construction and fuel.

The consequences of deforestation are extensive:

• Climate change: Forests store significant amounts of carbon, which is lost when cleared, exacerbating the greenhouse effect.

• Loss of biodiversity: Forests are home to many animal and plant species, and their habitats are destroyed by deforestation.

• Socioeconomic impacts: About a third of the global population depends on forests for their livelihoods. The destruction of forests also has severe consequences for vulnerable populations, including indigenous peoples and local communities, who depend heavily on forest ecosystems.

In response, the EUDR aims to reduce deforestation by regulating the trade of certain raw materials and derived products that contribute to it. The goal is to ensure that only deforestation-free raw materials and products are imported into the EU, made available on the EU market, or exported from the EU.

However, concerns about the EUDR are rising, as the regulation (like the German Supply Chain Due Diligence Act) places responsibility on companies to combat a global issue. This results in significant administrative burdens for affected companies.

2. Which Raw Materials and Products are covered?

In principle, the following are covered:

• Wood
• Coffee
• Cocoa
• Rubber
• Oil palms
• Cattle
• Soy

Relevant products derived from these raw materials listed in Annex I of the EUDR, if produced or “extracted” after June 29, 2023, and made available, placed on the market, or exported from December 30, 2024 (or December 30, 2025, if the proposed delay is adopted).

3. Who Is Affected by the Regulation?

The EUDR affects many stakeholders across global supply chains, classified within the EUDR as follows:

• Operators: The operator category includes all companies that make available for the first time on the Union market or export a relevant product as part of their commercial activity. These are usually importers, exporters or EU manufacturers of relevant raw materials and products.

• Traders: This category includes all companies which - without being operators - make relevant products available on the Union market, such as resellers.

4. Which Obligations will apply for Operators and Traders?

To prevent deforestation-based raw materials or products from entering or leaving the EU market, affected stakeholders have specific due diligence obligations. They must ensure that relevant raw materials and products

• are deforestation-free,
• have been produced in compliance with the producer country’s relevant legal requirements and
• a corresponding due diligence statement is available.

The due diligence obligations, resulting in either a new or referenced existing due diligence statement, consist of the following core requirements:

4.1 Internal Organizational Requirements

Companies must establish a risk management system, including the documentation of all necessary information. Additionally, a compliance officer at the executive level must be appointed, and an independent audit function must be provided. SMEs have some exemptions, such as not being required to appoint a compliance officer.

4.2 Information Gathering and Documentation

Companies must gather comprehensive information on the origin of their products or the raw materials used, including the geolocation of cultivation sites. This process often requires significant effort and depends on information from suppliers. Collected data must be retained for five (5) years from the time the product is placed on the market or exported.

4.3 Risk Assessment

Based on the collected data, companies must assess whether there is a risk that their products are linked to deforestation.

4.4 Risk Mitigation Measures

If a risk is identified, companies must take appropriate measures to minimize it, which can include gathering additional information or conducting independent audits. Only when no or a negligible risk remains may the relevant raw material or product be imported, placed on the EU market, or exported.

5. Are there any Simplifications regarding the Due Diligence Obligations?

Yes, SMEs have some specific simplifications. For instance, they may rely on a pre-existing due diligence statement for products already reviewed under the EUDR, unless there are clear indications of illegality, and thus are exempt from independent due diligence obligations.

Additionally, the EUDR exempts companies from risk assessment and mitigation obligations for raw materials and products from countries classified as low-risk for deforestation. The classification of countries is determined by the European Commission.

6. By when must the Obligations be implemented?

The EUDR includes a phased implementation timeline for these obligations:

• By December 30, 2024 (or December 30, 2025, if the delay is approved), companies must have a system in place to comply with due diligence requirements.

• An exception applies to companies that were established in the EU as micro or small businesses before December 31, 2020; these companies must comply by June 30, 2025 (or June 30, 2026, if the delay is approved).

• Specific conditions apply to wood and wood products, already regulated by the EU Timber Regulation (Regulation (EU) No. 995/2010), which remains effective for wood produced before June 29, 2023, until December 31, 2027 (or December 31, 2028, if the delay is approved).

7. Conclusion

Companies should take this time to adapt to the EUDR requirements. If not yet done, internal processes should be set up promptly to avoid legal risks, especially fines of up to 4% of EU-wide turnover. The extra 12-month period granted by the EU Commission is a welcome extension, though a year will pass quickly.

For initial support, the EU Commission has provided FAQs and guidelines. For remaining uncertainties, companies should adopt practices that align with the EUDR's purpose. As always, the EUDR sets the legal framework but cannot address all practical questions businesses may face.