The EU’s Regulation on deforestation-free products (the Regulation, (EU) 2023/1115) was published in the Official Journal of the EU on 9 June 2023. It was originally on course to apply across the EU from 30 December 2024, with micro and small entities (per the EU Accounting Directive) having until 30 June 2025 to comply.
Delayed application
In the midst of significant lobbying and calls for a delay, the European Commission (the Commission) has now proposed an additional 12-month 'phasing-in' period to ensure effective implementation. The Commission has adopted an amending regulation which would see the Regulation being delayed by 12 months and applying from 30 December 2025 (from 30 June 2026 for micro and small entities).
This amending regulation must go through the EU's ordinary legislative procedure and be adopted by both the European Parliament and the Council of the EU. This is a very tight timeline, particularly for the newly constituted Parliament, which is still finding its feet and has a busy schedule of Commissioner-designate hearings in the weeks ahead. To speed up the process, the Parliament could invoke the 'urgent procedure', as it did earlier this year to adjust certain rules under the Common Agricultural Policy. This would send the proposal directly to a plenary vote by the full Parliament, bypassing the Committee report stage of the legislative procedure. It is not yet known if this will occur.
Opposition to the Regulation has been vocal and insistent since its inception, centering on concerns around its scope and the practical implementation of certain provisions. Influential voices in the agricultural sector, non-EU governments (such as Australia, Brazil and Argentina), trade groups, and certain areas of the food industry, have been calling for a delay to allow for further guidance and possible amendment of the Regulation. In July 2024, a number of EU agriculture ministers backed a call by Austrian Agriculture Minister Norbert Totschnig for a temporary suspension and revision of the Regulation. In September 2024, German Chancellor Olaf Scholz called for the Regulation to be suspended until questions regarding its scope and application are answered.
Proponents of the Regulation are concerned that a delay could lead to amendments which will dilute the effectiveness of the Regulation. Human Rights Watch has said that the delay is “bad news for the climate-critical forests around the world as well as the human rights of indigenous peoples and other forest-dependent communities”. It is also being reported that a coalition of chocolate confectionary companies, including Nestlé, Ferrero, Mondelēz and Mars, oppose calls to reopen the substance of the Regulation.
What does the Regulation do?
The Regulation prohibits “the placing and making available” on the EU market, and the export from the EU, of “relevant products” (set out in Annex I) that contain, have been fed with, or made using “relevant commodities” that are associated with deforestation and forest degradation. There are seven “relevant commodities” for the purposes of the Regulation: cattle, cocoa, coffee, oil palm, rubber, soya and wood. In order to supply and sell these products on the EU market or export them from the EU, suppliers must perform due diligence on the origins of their products and verify that they are deforestation-free.
Scope
The Regulation is concerned with land subject to deforestation and forest degradation occurring after 31 December 2020. It applies to certain products produced on or after 29 June 2023, except for timber and timber products produced before that date, which are covered by the Timber Regulation (995/2010/EU) until 31 December 2027.
Relevant commodities and products
The Regulation is focused on relevant commodities and their derivatives, such as beef, leather, chocolate, coffee, paper, tyres and furniture. The clearing of forests to allow for the expansion of agricultural land devoted to these raw materials is considered the main contributor to deforestation and forest degradation. The Regulation applies to an extensive, but defined list of products which contain, are fed with, or made using relevant commodities. The list of in-scope products set out in Annex I to the Regulation may be amended and/or expanded by the Commission by way of delegated act and the first review of the list will take place in H2 2025.
Operators and traders
The Regulation applies equally to two categories of persons: operators and traders. An operator is defined as a legal or natural person who, in the course of a commercial activity, places (i.e. first makes available) relevant products on the EU market, or exports them. Where the operator is a person or business established outside the EU, the first EU-established person or business to make the products available on the EU market shall be deemed to be an operator and obliged to comply with the Regulation as such. A trader is broadly defined as any other person or entity in the supply chain who, in the course of a commercial activity, supplies relevant products for distribution, consumption or use on the EU market, whether in return for payment or free of charge.
Requirements of the Regulation
In order to place relevant commodities and products on the EU market, or export them from the EU, operators and traders must ensure the products:
- are deforestation-free (and the risk that they stem from deforestation or forest degradation must be nil or negligible)
- have been produced in accordance with the relevant legislation of the country of production (including, but not limited to, laws concerning environmental protection, human and labour rights, land use rights, tax and customs)
- are covered by a due diligence statement
Due diligence statement
The due diligence statement is the keystone to compliance with the Regulation. Without a valid due diligence statement, operators and traders cannot market, make available or export a relevant product or commodity. By submitting a due diligence statement to the relevant competent authority, the operator/trader assumes responsibility for the compliance of the relevant product. The Department of Agriculture, Food and the Marine is the designated competent authority in Ireland.
Due diligence is not a new concept, but the Regulation sets out the specific steps it requires operators and traders to take, as follows:
- They must collect (and keep for five years) information, data, and documents about the products, the country of production, and the specific (geolocated) plots where the relevant commodities were produced. This includes “conclusive and verifiable” information that the products are deforestation-free and that the commodities have been produced in accordance with local legislation.
- They must carry out a risk assessment against a series of criteria, including: the level of risk assigned to each country (or parts of it) by the Commission, the presence of forests, the prevalence of deforestation or forest degradation in the country (or parts of it), the reliability of the information, the complexity of the supply chain, and the presence of indigenous peoples. This assessment should be carried out at least once a year. Unless the risk assessment reveals no or only a negligible risk that the relevant products are non-compliant, they cannot be placed on the EU market or exported from the EU.
- They must adopt risk mitigation measures, such as gathering additional information, conducting independent studies and audits and/or adopting supplier support measures.
Traders and operators that qualify as small and medium enterprises (SMEs) are not required to complete due diligence themselves and may rely on statements obtained from the operators and traders who supply them, provided they are not aware of any information or substantiated concerns that the products are non-compliant.
Risk ranking
The Regulation introduces a benchmarking system that ranks countries (or parts of countries) as low, standard or high risk based on the risk of non-compliance for relevant commodities produced in that country or area. All export countries have been designated temporarily as standard risk. The Commission’s list of countries or parts thereof that present a low or high risk is still awaited. A large majority of countries worldwide are expected to be classified as 'low risk”' The Commission proposes to adopt the final country benchmarking system by 30 June 2025.
Operators and traders dealing with products from low risk countries will be able to avail of a simplified due diligence process, which exempts them from carrying out a risk assessment or implementing risk mitigation measures as part of their due diligence process.
Geolocation mapping
During the due diligence process, the operator/trader must pinpoint the geolocation of all plots of land from which the relevant commodities were produced in order to demonstrate that there is no deforestation occurring at a specific location after 31 December 2020. The Regulation does not stipulate any particular resource for obtaining this information and concerns have arisen that discrepancies arise depending on which source is used. For example, the Financial Times reported in July 2024 that Canberra’s 2023 Forests of Australia map and a 2020 map from the EU Observatory on deforestation and forest degradation differ because they used different definitions of forested areas.
Non-compliance
A competent authority may require an operator or trader to take “appropriate and proportionate corrective action” to bring their non-compliance to an end within a specified and reasonable period of time. Such corrective action could take the form of:
- rectifying any formal non-compliance (such as with the due diligence process or statement)
- preventing the relevant product from being placed or made available on the market or exported
- withdrawing or recalling the relevant product immediately
- donating the product to charity or disposing of it
National legislation is required to set out the penalties for non-compliance. Penalties could include fines, confiscation of products or income, and disqualification and/or exclusion from procurement processes and/or public funding. The Regulation states that fines must be “proportionate to the environmental damage and value” of the products concerned, gradually increasing with repeated infringements, and a maximum of at least 4% of a company’s EU turnover in the preceding year.
Guidance
At the time of announcing the proposed delay, the Commission also published long-awaited guidance along with updated FAQ on implementation and information on the methodology it will use to develop a benchmark for assessing deforestation risk.
A version of this article was first published in the seventh issue of the quarterlyo ESG & Sustainability Bulletin. Visit our ESG & Sustainability Hub for more content and to sign up to receive future issues of the ESG Bulletin.
