The long-awaited second part of COP-15 this December, which is the continuation of the UN Biodiversity Conference from October 2021, has put the European Parliament and Council under pressure to finalise the draft Deforestation Regulation that was first announced on 17 November 2021. In this blog we look at the main outstanding issues that need to be ironed out in the EU before the draft regulation can be settled.
By way of recap, the regulation seeks to prohibit the use of certain products associated with deforestation internationally (known as ‘forest risk commodities’). The new law would make it mandatory for any company selling relevant goods in the European Union to verify that those goods have not been produced on deforested or degraded land. For those who missed our previous blogs on the proposal for a regulation on deforestation-free products and its UK counterpart, see here and here.
At the end of September 2022, the first trilogue (a negotiation meeting between the Council, the Parliament’s rapporteur and the Environment Commissioner to try and agree on a final text) identified important differences between the positions of each EU institution:
What products should be in scope? The European Commission originally proposed six commodities which, along with products derived from said commodities, would be caught by the regulation: wood, palm oil, cattle, coffee, soy and cocoa. The Parliament wants to go further, adding corn, rubber, poultry, pork, goat meat and charcoal while the Council stuck to the Commission’s initial list. Any expansion of the listed commodities will result in many more industries being (directly or indirectly) caught by the provisions of the regulation. Already in its initial version, the scope stretches across diverse sectors such as food, garment, chemistry, pharma and cosmetics as well as renewable energy.
How should deforestation be defined? There was only limited agreement on the appropriate definition of ‘deforestation’ and ‘forest degradation’ in trilogues so far, the latter of which is not recognised internationally and therefore controversial. Many Nordic countries are particularly concerned by the Parliament’s push to include a forest’s conversion to a plantation forest as part of the deforestation definition, as plantation forests play a significant part in their economies, so any push to classify a plantation forest as contributing to deforestation would have a particularly significant impact for those Member States.
Should financial institutions be caught? Whilst the original proposal specifically excludes banks and financial institutions because the Commission considered this aspect was adequately covered in other pieces of financial regulation such as the Taxonomy Regulation, the Parliament has proposed that obligations also fall on financial institutions to check that their clients do not contribute to deforestation. This approach would be in line with other due diligence legislation regarding global supply chains, such as the proposed Corporate Sustainability Due Diligence Directive (see our blog post) which also specifically addresses financial institutions.
New rules on geolocation? All three institutions (Parliament, Commission and Council) agree that companies should provide the exact location of the plot of land from which they source commodities, with some flexibility offered from the Parliament through polygon mapping, although the industry continues to be heavily concerned by these requirements, on grounds that this information would be too difficult to obtain.
How tough should penalties be? The Council and Commission support a fine of at least 4% of a trader or operator’s annual turnover in the Member State concerned, whereas MEPs want to increase this to at least 8% of a company’s annual earnings in EU. Such an increase of the maximum fines would not be in line with enforcement under other EU regulations anymore, like the General Data Protection Regulation. It should be kept in mind that the imposition of administrative fines is not be the only possible sanction for non-compliance: the regulation already stipulates those commodities in scope as well as revenues can be confiscated by the competent authority, and relevant economic activities can be suspended or prohibited and affected companies can be excluded from public procurement.
At EU level, if agreement is reached on the regulation before the continuation of COP-15 on 7 December, it would still be likely to be another year before it came into force and being applicable to products produced after that date. However, the definition of deforestation-free products requires that land from which commodities are sourced has not been subject to deforestation or forest degradation after 31 December 2020, wherefore potential substitution of certain supply chains might be necessary and hence, companies should already start verifying their supply chains as regards potential links to deforestation. This so-called cut-off date is likely to be pushed to 2019 by the European Parliament.
Elsewhere, there has been little movement on equivalent UK legislation since June 2022 when the Government published its response to the public consultation on the implementation of due diligence on forest risk commodities provisions in the UK Environment Act 2021 , although secondary legislation is expected in due course. Likewise in the US, the FOREST Act has not progressed since its introduction in the US Senate in October 2021. It is unknown when or if the Act will come into force. The Act will still need to go through a multistep process of approval within the US Congress, which can take years, and could be amended significantly before passage or may never come into effect.
It is yet to be seen whether increased international attention on biodiversity during COP-15 will energise the UK and US deforestation proposals. They have probably got some catching up to do to keep pace with discussions currently underway within the EU, which is again positioning itself to be the first mover on the international stage on important sustainability issues. Companies therefore should continue keeping a close eye on the ESG developments at the EU level.