Will the new Deforestation-Free Products Regulation increase European due diligence requirements?

Key takeaways

• The landmark Deforestation-Free Products Regulation is set to effectively prohibit products associated with deforestation and forest degradation from being placed on the EU market or exported.
• These are primarily palm oil, cattle, wood, coffee, cocoa, rubber and soy, but also some derived products such as chocolate, furniture, printed paper and others.
• Operators and traders who place, make available or export the relevant commodities and relevant products will be subject to mandatory due diligence rules, checks and penalties.
• This article summarises the key requirements the Regulation places on your businesses, and looks at the developing due diligence framework in the EU.

Background to the Deforestation-Free Products Regulation

In 2021 the European Commission made a proposal for a new Regulation to address the issue of EU-driven deforestation and forest degradation. After intense negotiations, on 19 April 2023 and 16 May 2023 the European Parliament and the Council approved the final text of the Regulation. The final text was published in the Official Journal of the European Union on 9 June 2023 and will enter into force on 29 June 2023.

Who does the Deforestation-Free Products Regulation apply to?

The new Regulation applies to operators and traders that place or make available in the EU market, or export from it, "relevant commodities" or "relevant products."

• Relevant commodities means cattle, cocoa, coffee, palm oil, rubber, soya and wood.
• Relevant products means those that contain, have been fed with, or have been made using these commodities, such as leather, pneumatic tyres made of rubber, wood packaging, printed books, newspapers and pictures, chocolate and other food preparations containing cocoa. Annex I of the Regulations has a detailed list of products in scope.

What are the Deforestation-Free Products Regulation's key obligations?

Marketing and export ban

The Regulation effectively bans operators and traders from making available or placing on the EU market, or exporting from the EU, relevant commodities and relevant products unless they are:

• deforestation-free, meaning produced on land that has not been subject to deforestation since 31 December 2020;
• produced in accordance with the relevant legislation of the country of production, which includes laws on land use rights, environmental protection, forest-related regulation, third-party rights, labour rights, human rights protected under international law, tax, anti-corruption and customs regulations; and
• covered by a due diligence statement confirming due diligence was carried out and that the relevant commodities or products are deforestation-free and legally produced; this statement must be electronically submitted to the European Commission.

The above could pose challenges to operators and traders with global supply chains involving multiple relevant commodities or relevant products which fall within the scope of the Regulation. They will have to pay closer attention to how relevant commodities or relevant products are produced and whether they were produced in compliant with relevant national legislation.

Due diligence obligations

The due diligence statement will be based on a due diligence process that companies are required to conduct with the aim of collecting information, identifying risks and mitigating them.

In practice, operators and traders must collect, organise and keep the information and evidence relating to each relevant product for a period of five years from the date of placing, making available or exporting from the EU market.

This information includes, for example:

• geolocation of all plots of land where the relevant commodities contained in relevant products were produced;
• the date or time range of production;
• contact details of suppliers or clients; and
• "adequately conclusive and verifiable information" that the products are not the result of deforestation and that they were produced in full respect of applicable legislation in the country of production.

Based on the collected information, operators and traders must verify and assess the risk of possible non-compliance with the Regulation, taking into account certain "red flags." These include the presence of forests and deforestation track record in the country or region of production, indigenous people living in the area and potential claims brought by them, complexity of supply chains, and validity of sources used to carry out due diligence.

The Commission is working on a country benchmarking system, a list of countries classified as presenting a low, standard or high risk of deforestation and forest degradation. Based on this classification, products from low-risk countries will be subject to a simplified due diligence procedure and can be subject to 1% checks, compared to the 3% for standard-risk and 9% for high-risk.

The list needs to be finalised in the next 18 months, and for now all countries are classified as standard-risk.

Operators and traders that identify risks must mitigate them, for example by requiring additional information, data or documents, carrying out independent surveys or audits, or providing capacity-building support to suppliers.

The due diligence obligations imposed by the Regulation require the operators and traders to conduct detailed and technical assessments to ensure compliance of relevant products concerned as well as to implement mitigation measures which may be complex and difficult. In particular if the operators and the traders are sourcing relevant products from various countries with varying levels of deforestation and forest degradation risks. Having an open dialogue and cooperative business partnerships with the suppliers will also play a key role in assisting operators and traders in identifying and mitigating deforestation risks.

What if I don’t comply with the Deforestation-Free Products Regulation?

Penalties for non-compliance will be established by national law and may include:

• Fines of at least 4% of EU turnover
• Confiscation of the products or revenues gained from the non-compliant items
• Temporary exclusion from public procurement and public funding opportunities
• Temporary prohibition from dealing in the EU for those items or, for serious and repeated infringement, a prohibition from making use of simplified due diligence

What’s next?

The Regulation was published in the Official Journal of the European Union on 9 June 2023. It will enter into force on 29 June 2023, but the main obligations (including, amongst other things, due diligence obligations for operators and traders, obligations for competent authorities to carry out checks) will be applicable from 30 December 2024 and from 30 June 2025 for small and microenterprises.

In 2024, the Commission is required to present an impact assessment and, if appropriate, by a legislative proposal to extend the scope of the Regulation to "include other wooded land". By 2025, the Commission should also present an impact assessment and potential legislative proposal to extend the scope of the Regulation to "other natural ecosystems … such as grasslands, peatlands and wetlands" and to "further commodities, including maize" and biodiesel.

Therefore, it is likely that more commodities, products and geographical territories, will soon be subject to the Deforestation-Free Products Regulation. It is important for operators and traders to follow the development of this Regulation and the related secondary legislation closely to ensure compliance.

Why does the Deforestation-Free Products Regulation matter?

The Regulation is part of the EU's aim to reduce greenhouse gas emissions and halt biodiversity loss. More broadly, the Regulation contributes to the EU's wider objective to address, through various supply chain due diligence schemes, negative impacts of global value chains on the environment and human rights.

Other due diligence regimes for specific industries and products already exist or are planned. These include:

• the Conflict Minerals Regulation, which lays down supply chain due diligence obligations for importers of tin, tantalum, tungsten and gold originating from conflict-affected area
• the soon to be adopted Batteries Regulation, aimed at reducing the social and environmental impacts of batteries’ entire lifecycle
• the September 2022 proposal for a Forced Labour Regulation, aimed at prohibiting the marketing, export from and import into the EU market of products made with forced labour

In addition to sector- and product-specific regulations, the EU is also negotiating the much-awaited EU Directive On Corporate Sustainability Due Diligence. This legislation will set horizontal due diligence obligations for EU and non-EU companies, regardless of the sector they operate in, with the aim to identify, mitigate and prevent human rights and environmental violations across their value chains.

Despite difficult negotiations, the final legislation is expected to be adopted by the end of this year. To be ready for the new EU due diligence framework, EU and third-country companies operating on the Single Market should start monitoring their value chains and adopting appropriate measures. These include risk assessments, policies, codes of conduct, and contract clauses with suppliers.