The European Commission, Council and European Parliament reached provisional agreement on the new Deforestation Regulation on 6 December 2022, bringing in a raft of restrictions on the sale of cattle, cocoa, coffee, oil palm, rubber, soya and wood (and certain products made from those commodities) in the EU where production is linked to deforestation or is not in line with local laws of the country of production.
Subject to official endorsement by the Parliament and Council, the new regulation will prohibit the use of certain commodities or products associated with deforestation internationally (known as ‘forest risk commodities’) and will introduce mandatory due diligence obligations on companies supplying, exporting or placing on the market these goods in the EU. As we previously reported, companies will have to ensure goods have not been produced on deforested and degraded land, the latter being newly defined and not yet recognised internationally.
In this blog post we outline the key elements of the new regulation:
- Who is affected? All operators, i.e., any natural or legal person who, in the course of a commercial activity, places relevant products on the EU market or imports or exports them from the EU. That means non-EU companies that are operators in the EU market will fall within scope. Some derogations are introduced for small and medium-sized enterprises, such as exemptions from the obligation to exercise due diligence for products containing a commodity that has already undergone due diligence. Despite a push from the Parliament, financial institutions are not subject to the regulation. However, this exemption will be reviewed within two years of entry into force of the regulation.
- What are the obligations? They are three-fold: (1) ensure via appropriate due diligence that commodities and products are deforestation-free (i.e. have not been produced on land that has been subject to deforestation from 1 January 2021) and are produced in line with local laws of the country of production (including laws on human rights, e.g., protections for indigenous people); (2) collect information, documents and data on the relevant commodities or products (e.g., geolocation of all plots of land where commodities were produced; and (3) publicly report on the due diligence system, including the steps taken to implement the obligations, on an annual basis (reporting under other EU due diligence laws might fulfil this duty, e.g., under the Corporate Sustainability Due Diligence Directive).
- Products in scope: Alongside wood, palm oil, cattle, coffee, soy and cocoa, the Parliament succeeded in adding rubber to the list of commodities covered by the regulation, alongside additional derived products like charcoal and paper. Key sectors that are likely to be directly impacted by the regulation include retail, apparel, automotive, life-sciences, biofuels, paints and coatings, and cosmetics sectors. Two years after coming into force, the regulation will be reviewed, with a specific consideration being given to whether maize should be added as a commodity.
- Definitions of deforestation and forest degradation: The definition of deforestation is closely aligned with the UN Food and Agriculture Organization (FAO) definition, as shown here. The agreed definition says “‘deforestation’ means the conversion of forest to agricultural use, whether human-induced or not”. Non-forest but wooded lands have therefore been excluded from the definition, yet a review clause for adding other ecosytems like grasslands will be carried out within two years of entry into force. A definition of forest degradation has been added (“structural changes to forest cover, taking the form of the conversion of primary forests or naturally regenerating forests into plantation forests or into other wooded land and the conversion of primary forests into planted forests.”) but will only impact wood products.
- Due diligence requirements: The regulation notes that "prior to placing relevant products on the market or before exporting them, operators shall exercise due diligence with regard to all relevant products supplied by each particular supplier.” Substantial due diligence requirements are outlined in the regulation and include the gathering of information on geolocation of all plots of land, as well as date or time range of production, name of operator, and more. Operators must submit a due diligence statement containing this information to authorities.
- Penalties: Member States are able to set their own rules on penalties, which should be proportionate to the environmental damage and the value of the relevant commodities or products concerned. They should be set at the level of at least 4% of the operators' annual turnover in the EU and include a temporary exclusion from public procurement processes and from access to public funding.
- When must affected businesses comply by? The regulation is subject to official endorsement by the co-legislators before it is published in the Official Journal of the EU. We expect the regulation to become law by early Summer 2023. The requirements will apply 18 months later for large and medium-sized companies (so late 2024 by the earliest), and 24 months later for small and micro-sized companies.
This new legislation arrives with a raft of new EU due diligence and reporting regulations and aligns with the biodiversity focus of the European Green Deal. Our team has been closely tracking the rise in global biodiversity interest (see our recent blog) as well as other, wider obligations for due diligence (for example the EU Corporate Sustainability Due Diligence Directive, reported on here) and reporting (e.g., the Corporate Sustainability Reporting Directive here).
The new regulation will prohibit the use of certain commodities or products associated with deforestation internationally (known as ‘forest risk commodities’) and will introduce mandatory due diligence obligations on companies