Seeds of change: EU’s Deforestation-Free Products Regulation

From 30 December 2024 (or 30 June 2025 for small and medium-sized enterprises (SMEs)), those supplying, selling or exporting relevant products on the EU market will be impacted by the EU's Deforestation-free Products Regulation (EUDR). Relevant products will be prohibited from the EU market unless they are "deforestation-free", have been legally produced and are covered by a due diligence statement confirming no or negligible risk of non-compliance. Businesses that do not comply could face significant penalties, including a maximum fine of at least 4% of the business’ annual EU turnover.

Over the coming months and as the date for compliance draws nearer, we will release a series of articles on how businesses can prepare and comply. This first article recaps the basics of EUDR and the initial first steps that all businesses should consider.

Broadly, these steps are:

• companies should identify and assess whether any part of their business deals with any of the relevant products in the EUDR;
• companies should determine whether they are traders or operators and therefore subject to EUDR due diligence obligations;
• operators and non-SME traders should become familiar with their due diligence obligations and ensure they will be in compliance, including meeting the requirement to submit due diligence statements; and
• SME traders should ensure retention of certain limited information for a period of five years.

Overview

The EUDR entered into force on 29 June 2023. It is an ambitious regulation that, along with repealing and replacing the EU Illegal Timber Regulation, seeks to reduce: global deforestation; forest degradation; and the EU's greenhouse gas emissions. EUDR is also intended to complement the Corporate Sustainability Due Diligence Directive (CS3D) and imposes rigorous due diligence requirements for businesses within its scope (for more on CS3D, see our blog).

What relevant products are covered under EUDR?

The EUDR applies to seven commodities produced within and imported to the EU. These are: palm oil, soya, wood, cocoa, coffee, cattle and rubber. It also affects derived products from these commodities including, among others, chocolate, beef, leather, furniture and printed paper. A full list of all relevant products can be found in Annex 1 of the EUDR.

Products that are used or have reached the end of their lifecycle, and would otherwise be wastes, are excluded from the regulation. This exclusion does not, however, extend to by-products of manufacturing processes. Guidance from the European Commission is also expected to confirm the position regarding paper-based packaging – ie, it is expected that packaging to products will not have to comply with EUDR whereas packaging sold in its own right as a product will.

Not all parties have due diligence obligations under EUDR but it remains prudent for all businesses to be aware of the general requirements as it may be relevant to their position in any supply chain and/or sourcing relevant products in or from the EU market.

Practical step 1: companies should identify and assess whether any part their business deals with any of the relevant products identified in Annex 1 of the EUDR.

Who is covered?

EU-established businesses of all sizes will be caught by the regulation, albeit with a lighter regulatory burden on SMEs. The EUDR targets "operators" (being those who first introduce relevant products in the EU, or export from the EU) and "traders" (those in the supply chain who buy and sell relevant products within the EU thereafter). Note that "operators" also include those who indirectly introduce commodities or products in the EU (eg, via online sales).

Non-EU businesses who trade within the EU should expect to be asked by their EU-based customers to provide necessary information to comply with their due diligence obligations under the EUDR. This may indirectly mean introducing operational, administrative or reporting changes. Non-EU manufacturers of derived products may especially need to consider any practical implications for their facilities and production lines, especially if production caters for both EU and non-EU markets.

Practical step 2: companies should determine whether they are operators or traders and therefore subject to EUDR due diligence obligations.

What are the new legal requirements?

EU-established operators (and non-SME traders) must undertake due diligence to ensure that relevant products placed on the EU market are "deforestation-free". This means they must ensure that products:

• do not contain, have not been fed with or have not been made using, relevant commodities produced on land deforested or degraded after 31 December 2020); and
• have been produced in accordance with the laws of the country of production.

The key aspects of the due diligence requirements are summarised below:

Conduct due diligence

• Collect specific information on relevant products (Article 9 obligation), including quantities, suppliers, countries of production, evidence of legal harvest, CN Code and geolocation coordinates of sourcing plots of land (for more on collecting coordinates, see here).
• Verify this information and conduct risk assessments based on 14 criteria (Article 10 obligation), considering factors like forest presence, indigenous peoples, corruption, human rights violations, product mixing, supply chain compliance history and third-party concerns. How the information was gathered, was checked against the risk assessment criteria and how the risk was determined needs to be shown. If the risk assessment reveals more than a negligible risk, mitigating steps (Article 11 obligation) must be taken to reduce the risk to a no or negligible risk level before the relevant product can be placed on or exported from the EU market.
• Document risk assessments, review them annually, and provide them to authorities on request.

Operators (and non-SME traders) must then submit due diligence statements via an EU online information system to confirm that they have exercised due diligence and that there is no or only a negligible risk of non-compliance.

Once established, the system can be checked to ascertain whether relevant products are already covered by an upstream due diligence statement. This is particularly useful for traders, as although the same due diligence obligations remain, these upstream statements can also be referenced as part of that exercise.

Note: the EU Commission will introduce a benchmarking system to classify producer countries (or parts thereof) as high, standard or low risk of deforestation and forest degradation (for more information, see here). Sourcing commodities entirely from areas classified as low risk can be subject to simplified due diligence (Article 9 obligations only). The EU Commission is also expected to publish comprehensive EUDR guidance (anticipated in June 2024).

Due diligence statements

• Due diligence statements are required to be submitted to the relevant competent authority, declaring core information and that no or only a negligible risk of deforestation was found. The statement is in a prescribed format. Operators must provide reference numbers of their due diligence statements to businesses further down the supply chain.
• Establish and maintain effective due diligence systems and processes, and review them annually. Non-SME businesses must publicly report on their due diligence processes and compliance.

SME traders will not be required to submit due diligence statements, but they are required to gather and hold for five years certain limited information about the suppliers and recipients of the relevant products, including the previous due diligence statements on which they have relied.

Practical step 3: operators and non-SME traders should become familiar with their due diligence obligations and ensure they will be in compliance, including meeting the requirement to submit due diligence statements. SME traders must ensure retention of certain limited information for a period of five years.

What are the penalties?

Member states are required to designate competent authorities responsible for ensuring compliance with the EUDR. It is up to the competent authorities to set penalties for EUDR non-compliance, but they must be effective, proportionate, and dissuasive.

Such penalties can include:

• Fines proportionate to the environmental damage and the value of the relevant commodities or products, with a maximum fine of at least 4% of the business’ annual EU turnover;
• Immediate corrective actions, such as product confiscation or transaction revenue confiscation;
• Temporary exclusion from access to public funding and public procurement processes (up to 12 months); and
• Temporary prohibition from placing, making available, or exporting relevant commodities or products from the EU market.

Conclusion

It is not too late to get familiar with the EUDR and identify whether your business is an operator or trader with obligations under the regulation.

Until the release of the EU Commission's comprehensive guidance, the Commission's FAQs provides some informal, non-binding direction to member states, operators and traders on the implementation of the regulation.   

Undertaking due diligence could be a significant exercise with several challenges. Businesses with EUDR obligations are advised to audit their existing due diligence and supply chain arrangements to identify any additional steps that may need to be taken to gather and retain sufficient information, noting that this may need greater collaboration with third parties, contractual revisions and/or direct engagement with suppliers.

*With thanks to Klara Lee for her contributions to this article.