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HomeEU adopts new regulation to reduce global deforestation

EU adopts new regulation to reduce global deforestation

23 June 2023

On 29 June 2023, the new EU Deforestation Regulation (EUDR) enters into force. The Regulation requires EU companies to ensure that certain products they sell in the EU or export from the EU are not connected to deforestation. The EUDR is a significant step towards protecting forests and reducing the impact of the EU market on global forest degradation. The protection measures are extensive and affected companies will need to enact thorough due diligence procedures to ensure compliance.

Overview of the new rules

The new Regulation lays down rules for seven specific commodities: cattle, cocoa, coffee, palm oil, rubber, soya and wood, including products made with or containing these commodities. The rules will be applicable to companies involved in the commercial activity of placing these products on the EU market or making them available for export. The main obligations target non-SME companies, while SME companies are permitted certain exemptions from the rules.

Essentially, the EUDR prohibits the sale of these commodities and products within or outside the EU market unless applicable companies or suppliers can verify that three conditions are satisfied:

  • The products are “deforestation-free”, meaning that they do not come from land that has been subject to deforestation after 31 December 2020;
  • The products have been produced following the laws of the country where they were made; and
  • The products are covered by a due diligence statement.

Due diligence requirements

The due diligence requirement is a crucial part of the EUDR. Companies must follow a thorough three-step due diligence process before selling relevant products on the EU market or exporting them:

  • Collecting information, documents and data to demonstrate that the relevant products comply with the three conditions stated above;
  • Conducting a risk assessment based on the collected documentation to establish whether there is a risk of non-compliance; and
  • Adopting risk mitigation measures such as gathering additional information, conducting independent surveys and audits, or supporting suppliers through capacity building or investments.

If the due diligence process reveals no or only a negligible risk of non-compliance, companies must submit a due diligence statement to the competent authorities through an information system to be established by the EU Commission. Only hereafter can the products be sold on or exported from the EU market.

To ensure ongoing compliance, companies are required to establish a due diligence system and update it at least once a year.

The risk benchmarking system

The new Regulation also introduces a three-tier risk benchmarking system to be implemented by the Commission 18 months after the EUDR enters into force. This system will evaluate and categorize countries as having either a high, low, or standard risk of producing products linked to deforestation. The classification will consider criteria such as the rate of forest degradation in the country and production trends of relevant commodities.

Companies operating in or exporting from countries classified as high risk will face stricter scrutiny and be required to conduct more rigorous due diligence when sourcing from these locations. On the other hand, companies operating in countries classified as low risk will have fewer compliance requirements.

Which companies will be affected?

The new Regulation aims to make EU companies accountable for the environmental impact of their supply chains. It has the potential to impact a wide range of companies. European supply chains involving not only the seven specific commodities and their derivatives but also any product made from these, such as meat, leather, chocolate, cosmetics etc. will be affected. Compliance with the EUDR may pose challenges and be costly for many European supply chains. Companies should promptly assess if and how they will be affected by the EUDR, and, if so, review their existing processes, governance frameworks, and supply chain risks, to ensure compliance with the new obligations. It is worth noting that the Regulation has not set out any de minimis thresholds for companies selling products which only contain insignificant amounts of the relevant commodities. The obligations will therefore be relevant to a large number of EU companies.

Penalties for infringements

Violations of the EUDR will result in severe penalties. EU Member States must lay down specific rules on penalties, which according to the EUDR shall include:

  • Fines of up to at least 4% of the company’s total annual Union-wide turnover in the preceding year;
  • Confiscation of relevant products or revenue gained from violations;
  • Debarment from public procurement processes and access to public funding for up to 12 months for serious or repeated infringements;
  • Temporary prohibition against selling relevant products on or exporting them from the EU market.

Additionally, EU Member States must notify the Commission of judgments against companies for EUDR violations, and the Commission will publish a list of these judgments to ensure accountability.

Entry into force and enforcement

The EUDR was published in the EU Official Journal on 9 June 2023, and it will officially enter into force 20 days later, on 29 June 2023.

Non-SME companies will have 18 months to implement changes to comply with the main obligations of the Regulation, while SME companies have a longer period of 24 months to comply with the new rules.

The rules will be enforced by a designated national competent authority, which in Denmark will be the Danish Environmental Authority.

The new European Union Deforestation Regulation can be accessed here.

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