On May 16, 2023, the European Union (EU) adopted a Deforestation Regulation that will ban the marketing in and export from the EU/EEA of a wide range of products associated with deforestation, and also require in-scope companies dealing with these products to implement significant due diligence and risk assessment measures. It is expected that the new Regulation will be published in the EU Official Journal in June 2023. The ban and other requirements will then apply to large and medium-sized companies as of late 2024 or early 2025.
The due diligence requirements imposed by the Deforestation Regulation are extensive and will require companies to invest in their due diligence and procurement processes. Enforcement will be at the local level but the Regulation also notably requires Member States to provide for private complaints mechanisms and a route for “sufficiently interested” persons (which could include NGOs and competitors) to challenge the legality of authorities’ enforcing decisions, acts, or omissions.
The Deforestation Regulation adds to various other environmental and human rights-related due diligence requirements and enforcement developments (some of which we covered in our recent global round-up on business and human rights developments). This alert outlines the Regulation’s main features, discusses what companies can do to prepare for compliance, and briefly covers parallel developments in the UK.
Scope of the Ban
The Deforestation Regulation will apply to certain listed “Relevant Commodities,” namely cattle, cocoa, coffee, palm oil, soya, rubber, and wood. It will also apply to listed “Relevant Products” made from, containing, or fed with such “Relevant Commodities,” including, among others: beef; leather; soy beans, flour and oil; chocolate and other foods containing cocoa; coffee, palm nuts and oil; fatty acids, peroxides and glycerol; wood; printed products (including books, newspapers, pictures); furniture; and natural rubber, rubber tires, conveyer and transmission belts.
The Regulation will ban placing Relevant Commodities or Relevant Products on the EU/EEA market, or exporting such products from the EU/EEA market, unless they are: (i) “deforestation-free”; (ii) produced in accordance with the relevant legislation of the country of production; and (iii) covered by a due diligence statement.
(i) Deforestation-Free
To establish that a Relevant Commodity or Relevant Product is deforestation-free, companies must show that it was produced on land that has not been subject to deforestation since December 31, 2020. The Regulation defines deforestation as the conversion of forest to agricultural use, whether caused by human action or other factors (e.g., deforestation caused by extreme weather patterns).
The Regulation introduces further rules for Relevant Products that contain or have been made using wood. For such products, companies must show that any wood harvested after December 31, 2020 was harvested without causing forest degradation. Forest degradation is defined as 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.
(ii) Produced in Accordance with Relevant Legislation in the Country of Origin
The production of Relevant Commodities and Relevant Products must comply with the laws in the country of production that relate to: land use rights; environmental protection; forest-related regulations (including those that relate to forest management and biodiversity conservation); third party rights; labor rights; human rights protected under international law (including the principle of free, prior, and informed consent); and tax, anti-corruption, and customs regulations.
(iii) Covered by a Due Diligence Statement
Prior to marketing Relevant Products and Relevant Commodities in, or exporting them from, the EU/EEA, companies must electronically submit a due diligence statement to the European Commission. The due diligence statement must confirm that due diligence was carried out and that the Relevant Products and/or Relevant Commodities are deforestation-free and were legally produced (i.e., that there was no risk or only a negligible risk that these conditions were not satisfied).
Required Due Diligence for Companies
The Regulation provides that the due diligence process underlying the due diligence statement must include: (i) collection of specified information, documentation, and data; (ii) adoption of specific risk assessment measures; and (iii) adoption of specific risk mitigation measures, if applicable.
(i) Collection of Required Information, Documentation, and Data
For each Relevant Product, companies must collect, organize, and keep specifically defined information (along with supporting evidence) for five years from the date of the placement on, or export from, the EU/EEA market. Among other information, companies must identify:
- the geolocation of all plots of land where the underlying Relevant Commodities have been produced; the date or time range of production;
- the contact details of individuals/entities that have supplied the Relevant Products to the company, and those to whom the company has supplied the Relevant Products;
- “adequately conclusive and verifiable information” that the Relevant Products are deforestation-free; and
- “adequately conclusive and verifiable information” that the Relevant Commodities were legally produced in the country of production.
(ii) Specific Risk Assessment Measures
Economic operators must also conduct a risk assessment to establish whether there is a risk that the Relevant Products may be non-compliant with the Deforestation Regulation. Among other criteria, the risk assessment must take account of:
- the presence of forests in the country and area of production;
- the presence of indigenous peoples in the country, region, and area of production;
- the prevalence of deforestation or forest degradation in the country, region, and area of production;
- the source, reliability, validity, and links to relevant documentation; and
- complexity of the relevant supply chain and the stage of processing of the Relevant Products.
The risk assessment must be documented, reviewed on an annual basis, and made available to the competent authorities upon request.
(iii) Risk Mitigation Measures
Where an economic operator’s risk assessment has identified risks of potential non-compliance with the Regulation, it must adopt risk mitigation measures that “are adequate to reach no or negligible risk.”
Such risk mitigation measures may involve: securing additional information, data, or documents; undertaking independent surveys and audits; or supporting supplier compliance with the Regulation through capacity-building support and investments.
In any case, in-scope companies must have in place “adequate and proportionate policies, controls, and procedures” to mitigate and manage effectively the risks of non-compliance, which must include: (i) model risk management practices, reporting, record keeping, internal control, and compliance management (including, for large companies, the appointment of a compliance officer at management level); and (ii) an independent audit function to check the internal policies, controls, and procedures identified above.
Anticipated Commission Guidance
Within the next 18 months, the European Commission must publish a list of countries outside the EU/EEA that produce Relevant Commodities or Relevant Products and classify them as high risk, standard risk, or low risk. This assessment, which must be undertaken in coordination with the listed countries, will be mainly based on the country’s rate of deforestation and forest degradation, the rate of expansion of agricultural land for Relevant Commodities, and production trends for Relevant Commodities and Relevant Products. The classification will impact the level of review that companies will need to conduct when undertaking their due diligence, as well as enforcement.
The Regulation also allows the Commission to issue technical guidance to facilitate the practical implementation of the rules. Such guidance may be necessary to clarify some definitions and practical aspects of the Regulation.
Enforcement by NGOs and other Private Parties
In addition to requiring Member States to take enforcement measures, the Regulation requires Member States to allow private parties to take legal action to ensure that the Regulation is sufficiently enforced.
In particular, any person or legal entity will be able to submit a “substantiated complaint” to the competent authorities against non-compliant operators, and any natural or legal person with a “sufficient interest” will be able to challenge the legality of decisions, acts, or omissions of the Member States’ enforcement authorities through administrative or judicial procedures. Entities with a “sufficient interest” may include EU-based NGOs or groups representing the interests of indigenous peoples, as well as competitors. These provisions will increase the pressure on EU/EEA Member States to effectively enforce the Regulation’s requirements.
Related Deforestation Law in the UK
Note also that the EU is not alone in its efforts to combat deforestation. In the UK, the Environment Act 2021 introduced provisions making it illegal for larger businesses operating in the UK to use key forest-risk commodities which were grown on illegally occupied or illegally used land. Businesses in scope will also be required to conduct due diligence on their supply chains and produce an annual report on their due diligence systems, or risk fines and other civil sanctions (see here for our earlier report on the Environment Act 2021). The UK Government’s Environment Plan 2023 states that the Government will be operationalizing these provisions through secondary legislation at the earliest opportunity.
What Companies Can Do
Companies involved in exporting Relevant Commodities or Relevant Products to or from the EU/EEA, or marketing such commodities and products in the EU/EEA, should begin to prepare for compliance with the Regulation. The due diligence requirements imposed by the Deforestation Regulation are extensive and will require companies to invest in their due diligence and procurement processes.
To leverage internal compliance resources effectively, multinational companies may want to consider how best to develop a global, cross-functional approach to ESG (environmental, social, and governance)-related due diligence that takes into account all applicable current and forthcoming ESG laws. Companies that align their global due diligence practices with existing international standards (such as the OECD Guidelines on Multinational Enterprises and the UN Guiding Principles on Business and Human Rights) and invest in robust supply chain mapping and risk assessment measures are likely to be best positioned to meet the requirements of these laws.
Foreign producers and their trade associations may also wish to consider mobilizing and engaging with the European Commission to ensure the appropriate risk profile classification of the countries in which they operate.
If you have any questions concerning the material discussed in this client alert, please contact the members of our ESG practice.
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