Are You, and Your Supply Chain, Ready for the Deforestation Regulation?

Cattle, cocoa, coffee, oil palm, soya, wood, rubber?  Do you sell any of these commodities? Do you sell any products derived, containing or using any of these commodities? Are there any companies in your supply chain which sell or use these commodities, or derivative products?  Do you (or others in your supply chain) sell products in the EU/EEA, or export products from the EU/EEA?  If so, you – and your supply chain – must likely comply with the Deforestation Regulation.[1] And getting ready is no easy feat – even despite the recent actions to postpone some of the application deadlines of concern. 

Aim

At core, the Deforestation Regulation aims to prohibit the sale in the EU/EEA, and export from the EU/EEA, of products which cause deforestation. It has two underlying objectives: (1) to ensure all relevant EU/EEA products are “deforestation-free”; and (2) to stop deforestation in non-EU countries by preventing supply-chains extending into, or out of, the EU/EEA – from relying or benefitting from products causing deforestation in those countries. The EU drive towards stopping deforestation is rooted in a number of key EU policy objectives laid down in the European Green Deal, but also the European Climate Law and EU initiatives to reduce greenhouse gas emissions. 

Scope

At first glance, the scope of the Deforestation Regulation could possibly seem rather limited. The Deforestation Regulation generally applies to all “relevant commodities” and “relevant products” placed on the EU/EEA market or exported out of the EU customs territory – with certain exceptions / derogations. Seven commodities are currently listed in Annex I: Cattle, Cocoa, Coffee, Oil palm, Soya, Wood, and Rubber.  This is despite some efforts from the European Parliament to extend the list of commodities, e.g. to include charcoal, maize and derived products like biofuels. However, the scope of the Deforestation Regulation may be expanded to cover other commodities and products in the future.  The Commission has been provided legal powers, and tasked with certain legal obligations, regarding the possible expansion of the Deforestation Regulation.^[2],[3] 

In any event, the Deforestation Regulation applies to all “relevant products”. This includes the products listed in Annex I that “contain, have been fed with or have been made using relevant commodities”.^[4] Annex I contains a list of entries of “relevant products”, with reference to Annex I of Regulation 2658/87 setting out the Combined Nomenclature. In principle, all products “made using” relevant commodities include all derivative and downstream products, including, for example: paper and pulp (wood) and chocolate (cocoa) – although a number of exclusions and exemptions do apply. The Deforestation Regulation applies to products produced inside the EU/EEA. Companies which produce relevant products in the EU/EEA must comply with Deforestation Regulation requirements on due diligence even in those cases where the upstream entity is also an EU/EEA company who is required to comply with the Deforestation Regulation requirements on due diligence. The Deforestation Regulation generally applies regardless of the quantity or value of the products themselves. 

A potentially significant number of products and commodities may, therefore, fall within the scope of the Deforestation Regulation, and legally required to comply with it.  And that number may increase – as new commodities and/or products are potentially added to the scope of the Deforestation Regulation over time. That is particularly the case given not merely the definitions of commodities and products contained within the Deforestation Regulation, but also the broad legal definitions of the term “deforestation”[5] included in the Deforestation Regulation, and the relatively new concept of “forest degradation” also covered by the Deforestation Regulation – which encompasses “harvesting operations that are not sustainable and cause a reduction or loss of the biological or economic productivity and complexity of forest ecosystems […]”.[6]

Core requirements

The Deforestation Regulation essentially prohibits relevant commodities and relevant products from being placed on the EU/EEA market, or exported from the EU/EEA, unless they: (a) are deforestation-free; (b) have been produced in accordance with the relevant legislation of the country of production; and (c) are covered by a due diligence statement.[7]

Broadly speaking, the Deforestation Regulation differentiates between two different types of companies and persons engaged in the production and supply of relevant products – and imposes different and separate legal requirements on each group.  On the one hand, the Deforestation Regulation imposes legal requirements on companies and persons deemed as “operators” under the Deforestation Regulation.  On the other hand, the Deforestation Regulation imposes legal requirements on companies and persons deemed as “traders” under the Deforestation Regulation. “Operators” include “…any natural or legal person who, in the course of a commercial activity, places relevant products on the market or exports them”.[8] The definition of an “operator” under the Deforestation Regulation generally includes companies which transform one product listed in Annex I into another product listed in Annex I. “Traders” include “any person in the supply chain other than the operator who, in the course of a commercial activity, makes relevant products available on the market”.[9]

Operators cannot make available any relevant product on the EU/EEA market, or export any such product outside of the EU/EEA if: (a) the relevant products are non-compliant with the Deforestation Regulation; (b) the exercise of due diligence has revealed a non-negligible risk that the relevant products are non-compliant with the Deforestation Regulation; (c) the operator was unable to fulfil the requirements regarding exercise due diligence and/or submission of a Due Diligence Statement.[10]

Before placing any relevant product on the EU/EEA market, and/or exporting any relevant product outside of the EU/EEA, an operator must, generally speaking, “exercise due diligence”[11] which includes: (i) collecting relevant information; (ii) conducting a risk assessment – including on human rights issues regarding indigenous peoples etc; and (iii) implementing risk management measures.

(i) Collection of information

The collection of information should aim at demonstrating that: the relevant commodity or product in question is deforestation-free; that it is produced according to relevant law; and that it is covered by a due diligence statement.  The EU legislator lists a number of documents which must be collected for this purpose. These include standard data about the product (product description, quantity, country of production) and on the entities involved in the trade of the goods (name, postal and email address of the relevant entities), as well as precise information about the plot of lands used to produce the goods. Indeed, the Deforestation Regulation generally requires operators to provide the geo-localisation of all plots of land where the relevant commodities that the relevant product contains, or has been made using, were produced, as well as the date or time range of production. What is more, operators must also provide “adequately conclusive and verifiable information that the relevant products are deforestation-free” and that the relevant commodities have been produced “in accordance with the relevant legislation of the country of production”.

(ii) Risk assessment measures

On the basis of the information collected and any other relevant information, the operator is required to assess risks that the products are non-compliant. The EU legislator lists several criteria to take into account a minima. In essence, operators should consider (i) whether the country of production has forests and if deforestation or forest degradation is prevalent in that country, (ii) the country’s struggles with issues like corruption and data falsification as well as potential risks of circumvention (including due to the complexity of the supply chain), and (iii) indigenous peoples’ and human rights violations in the country of production.

If the risk assessment reveals “no or only a negligible risk” that the relevant products are non-compliant, operators may place the relevant products in the Union market or export them.

(iii) Risk mitigation measures

A contrario, if a non-negligible risk of non-compliance exists, operators must adopt risk mitigation procedures and measures to achieve no or only a negligible risk prior to placing the relevant products in the Union market or exporting them. These procedures must in principle include (i) model risk management practices, reporting, record-keeping, internal control and compliance management, including the appointment of a compliance officer at management level for non-SME operators, as well as (ii) an independent audit function to check the internal policies, controls and procedures.

In order to exercise due diligence, the operator must, in principle, establish and keep up-to-date a framework of procedures and measures (i.e. a so-called “Due Diligence System”) which ensure products comply with the Deforestation Regulation.  Operators are also generally required to publicly report as widely as possible, including via the internet, on the due diligence system.  This includes publicly disclosing this information in reports required under other EU legislation concerning value chain due diligence (e.g. CSRD, CS3D, etc).  As a minimum, certain information on the due diligence system must be publicly disclosed.  Operators must generally submit a so-called “Due Diligence Statement” to EU authorities for relevant products, before placing those products on the EU market or exporting.  The Due Diligence Statement must generally contain: (a) the information on the relevant product as prescribed and required under the Deforestation Regulation; (b) a declaration by the operator that the operator has exercised due diligence; and (c) that no or only negligible risk was found.

Recent developments: Postponement of application deadlines

Following a number of other calls and similar pressure, on 25 September 2024, 28 organisations issued a joint statement calling for a delay in the entry into the application of the Deforestation Regulation stating, amongst other things, that implementing the Deforestation Regulation by the end of 2024 was “simply unfeasible” and would “result in many small businesses being wiped out of the market and job losses in rural areas”.[12] These calls were further supported by, amongst others, some Members of the European Parliament, and Cem Özdemir, the German Food and Agriculture Minister.[13] It also follows some recent caselaw, illustrating that certain operators were struggling to comply even with similar, but less onerous, legal requirements.    

On 2 October 2024, the Commission published a proposal to amend the Deforestation Regulation as regards the date of application.[14] That proposal stated amongst other things that the Commission considered that the date of application of Article 38(2) of the Deforestation Regulation, “should be postponed by 12 months” and that this was “objectively necessary” in order to allow third countries, Member States as well as operators and traders to be “fully prepared, including, for the latter to establish the necessary due diligence systems covering all relevant commodities and products, so to be in a position to fully comply with their obligations”. The proposal also stated that in the light of that postponement “the dates in other interlinked provisions, in particular the repeal of Regulation (EU) No 995/2010, the transitional provisions and the provisions on the deferred application of Regulation (EU) 2023/1115 to microundertakings or small undertakings, should be adjusted accordingly” but that “to provide operators and traders with the information on assignment of risk to relevant countries of production well in advance before their due diligence obligations start to apply, the date by when the Commission is to classify countries or parts thereof, that present a low or high risk should be postponed only by 6 months…”.[15] On 16 October 2024, the Council agreed to extend the relevant application deadlines.[16]

Other Recent developments: Guidance and FAQs

On 2 October 2024, the Commission published draft guidance on the Deforestation Regulation.^[17]The draft guidance contains information on the currently applicable deadlines under the Deforestation Regulation. On 2 October 2024, the Commission also revised its ‘Frequently Asked Questions Implementation of the EU Deforestation Regulation’ (Version 3 – October 2024).[18]  The FAQ answers new questions, and now contains an additional chapter devoted to penalties under the Deforestation Regulation.

What should companies do now? 

1. The European Parliament is now considering the proposed Regulation amending some of the application deadlines currently set out in the Deforestation Regulation. EU Institutions aim to have the amending Regulation formally adopted and published in the Official Journal of the EU so that it can enter into force by the end of the year. However, companies should not see the postponement of the application deadlines (presuming the deadlines are indeed postponed) as an opportunity to put-off preparations for the Deforestation Regulation.  
   
   
2. Companies should continue to work diligently to ensure compliance with the Deforestation Regulation by the relevant deadlines. Firstly, given the pressures and push-back there has been from NGOs and others regarding the Commission’s decision to propose a postponement of the application deadlines – it follows that, when those deadlines expire, the enforcement authorities may find themselves under increased pressure to adopt a zero tolerance approach as regards any potential breach, and pursue enforcement with increased vigour. Secondly, companies – including CEOs, C-suite officers, and their leadership teams – should remain fully aware of possible criminal charges for breach of the Deforestation Regulation. Earlier this year the Environmental Crime Directive entered into force. The Environmental Crime Directive requires EU Member States to ensure that where there is unlawful and intentional placement or making available on the EU/EEA market or export from the EU/EEA market of relevant commodities or relevant products, in breach of the prohibition set out in Article 3 of Deforestation Regulation it shall, in certain circumstances – constitute a criminal offence. Litigation risk, including the prospect of cases brought under collective redress schemes and/or as class actions, will be of particular concern in certain situations.   
   
   
3. Instead of putting-off devising and implementing compliance strategies, companies should act now to: (1) understand and assess the recently published guidance; and (2) determine what products are, and may not, be in scope, and (3) take relevant action. Companies should consider not merely the products or commodities they themselves supply, but also – and perhaps more importantly – the products, raw materials and commodities up their supply chains. That is particularly the case where downstream entities rely upon the information and documentation provided to them by upstream entities. In addition, companies should, amongst other things, identify and resolve challenges in the links and overlaps with the Deforestation Regulation and other EU legislation (CSRD, CS3D, Batteries Regulation, Forced Labour, ESPR, green procurement, critical raw materials Regulation, etc); and other national law requirements (e.g. France Vigilance Law).