The EU Deforestation Regulation: an update and what it means for companies
On 14 November 2024, the European Parliament voted in favour of the European Commission (“EC”)’s proposal to delay by one year the application date of the EU Deforestation Regulation (“EUDR”). In this briefing, we look at what the EUDR means for companies.
What is the EUDR at high level?
The EUDR is a measure designed to combat deforestation and forest degradation. It is one of the EU’s various commitments toward reducing greenhouse gas emissions and reaching climate neutrality by 2050.
Under the EUDR, an “operator” who places certain commodities (like cattle or cocoa) or derived products (like leather or chocolate) on, or exports them from, the EU market must be able to prove that the commodities or products did not originate from recently deforested land or contribute to forest degradation. Similar obligations apply to a “trader” who makes such commodities or products available on the EU market. As part of this, EUDR imposes supply chain due diligence requirements on operators and traders.
When will the EUDR take effect?
Following the agreed delay, the requirements of the EUDR will start applying for large operators and traders from 30 December 2025 and for small and micro entities from 30 June 2026. It is expected, however, that a revised version of the EUDR will be released in 2025 which should clarify timings around implementation as well as country risk classifications as mentioned below.
What products are in scope?
The EUDR repeals and replaces the EU Timber Regulation and broadens the products in scope: it targets seven commodities of cattle, cocoa, coffee, oil palm, rubber, soya and wood. For each commodity, there are specific derived products that are in scope according to a list of EU customs codes. For example, leather (for cattle), chocolate (for cocoa), coffee whether or not roasted or decaffeinated (for coffee), palm nuts and kernels (for oil palm), inner tubes (for rubber), soya beans (for soya) and printed books (for wood). The obligations of EUDR apply whether the products are made available on the market through traditional or online means.
There are certain exemptions of products, for example those which would otherwise have been discarded as waste and in respect of packaging for the products.
What entities are caught?
The EU applies to both operators and traders. Generally, an operator places relevant products on the EU market for the first time or exports them from the EU, whereas a trader makes relevant products available on the EU market for distribution, consumption or use. In both cases, this would be in the course of commercial activity.
As of now, the EUDR does not apply to financial institutions, though this will be reviewed in due course.
What does the EUDR prohibit?
Under the EUDR, relevant commodities/products must not be placed or made available on the EU market or exported unless the three conditions below are met:
- They are deforestation-free—this means the products must not contain, been fed with or been made using relevant commodities that were produced on land subject to deforestation or where wood was harvested inducing forest degradation, in either case after 31 December 2020.
- They were produced in accordance with relevant laws of their country of production—the EUDR refers here to relevant laws in areas of land use rights, environmental protection, labour rights and human rights, among others.
- They are covered by a due diligence statement—this must be based on a due diligence risk assessment and confirm the products come from sources that are deforestation-free and comply with the country’s laws.
What are operators’ and traders’ obligations under EUDR?
At high level, operators and traders must (i) exercise due diligence in order to prove the relevant products comply with the three conditions discussed in the section above and (ii) submit a due diligence statement to relevant authorities containing specific information including that due diligence was exercised and no risk or only a negligible risk of non-compliance was found. They must also communicate to operators/traders further down the supply chain all information necessary to demonstrate that due diligence was exercised and that no risk or only a negligible risk was found.
In certain cases, operators or traders can rely on previously submitted due diligence statements; however, they must first ascertain that prior due diligence was properly exercised and they still retain responsibility for the compliance of the products with EUDR.
The obligations are less onerous in certain respects for SME operators/traders—for example, SME traders are exempt from needing to submit a due diligence statement however must store and share supply chain data with downstream entities and national authorities on request.
What does due diligence entail?
The due diligence obligations under the EUDR are prescribed, and must include:
- the collection of certain information, data and documents—for example, the geolocation of all plots of land where the relevant commodities were produced and the contact details of any business to whom the relevant products have been supplied;
- risk assessment measures which take into account certain criteria—for example, the presence of forests and the consultation with indigenous peoples in the country of production; and
- risk mitigation measures—for example, carrying out independent surveys or audits or requiring additional information, data or documents.
Due diligence procedures and measures must be reviewed annually and updated whenever any potentially relevant developments arise. In due course, it is envisioned that non-EU countries will be classified as no, low, standard or high risk countries, which will inform the stringency of due diligence requirements.
What are the penalties under the EUDR?
Relevant authorities are obliged to conduct checks on operators/traders—which in principle could occur without warning. Entities found to be in breach of their obligations could face remedial and corrective actions and/or penalties, from seizure and confiscation of products, temporary prohibition from placing or making products available on the market, to maximum fines of no less than 4% of EU turnover.
What are other recent developments?
Alongside the delay to the application date, the EC published guidance on the EUDR, updated FAQs and the principles of methodology it will apply to the EUDR benchmarking exercise of non-EU countries’ risk levels, mentioned above.
What is our advice to companies?
All operators and traders involved in the supply chain of relevant products, regardless of their size, could potentially be affected by the EUDR. The heavier burden will inevitably be on larger entities, but SMEs will need to be aware of their assessment and reporting obligations.
Given the one-year delay to the application date, it is important that companies use the additional time available to get themselves into a position to be compliant. It is envisaged that there will be a dedicated information system into which operators and traders will be able to register and submit due diligence statements even before the law's entry into application.
The EUDR is just one of a number of new instruments driving a focus on human rights and environmental due diligence. Some of those instruments, like the EUDR and the EU Corporate Sustainability Due Diligence Directive (CSDDD) (on which we wrote about here), impose specific requirements as to the due diligence that must be done. Others, like the EU Forced Labour Regulation (on which we wrote about here), will necessitate due diligence if a business is to comply, even if they do not do not mandate a particular due diligence process.
For some companies these instruments will apply directly. For others, they will apply indirectly because the companies are in the value chain of others which are in scope. The CSDDD, for example, requires in-scope businesses to cascade higher standards of human rights due diligence to their suppliers.
While it is clear, therefore, that regulations are driving up standards of human rights and environmental due diligence for everyone, businesses need to carefully assess the requirements that apply directly and indirectly to them. Taking a step back in this way will avoid falling into the trap of taking a piecemeal and reactive approach to these new rules and, instead, allow business to develop a strategic approach to due diligence that meets the needs of the business and its stakeholders and is appropriate to its size and resources.
For more information and tailored advice as needed on the EUDR or related regulations, please email your Charles Russell Speechlys contact.
