- June 28, 2023
- Posted by: Florence
- Category: Uncategorized
At a Glance…
On 17 November 2021, the European Commission (Commission) proposed a Regulation to curb EU-driven deforestation and forest degradation. The Council and the European Parliament reached a joint provisional agreement in December 2022. Regulation (EU) 2023/1115 on making available on the Union market as well as export from the Union of certain commodities and products associated with deforestation and forest degradation (the Regulation) was published in the Official Journal of the European Union on 9 June 2023 and will enter into force 20 days after its publication, on 29 June 2023.
In essence, to fight climate change and biodiversity loss, the Regulation obliges companies to ensure that cattle, cocoa, coffee, palm oil, rubber, soya and wood products sold in the EU and exported from the EU have not led to deforestation and forest degradation. To do so, the Regulation sets mandatory rules on due diligence and data collection, as well as reporting obligations on all operators and traders who make available on the EU market, or export from the EU market, the covered commodities and their derived products.
The Regulation aims to incentivise the transition to sustainable supply chains by encouraging sustainable behaviour from exporting businesses in all producing countries of deforestation-related products, within and out of the EU. The Regulation intends to achieve a cascade effect from rural producers all the way up to national governments by encouraging companies to relocate their operations away from high-risk producers to low-risk commodity-producing manufacturers.
Below, our supply chain team explains some key elements of the Regulation, its practical implications for operators and traders, and provides a comparative analysis with the upcoming UK deforestation due diligence regime.
Authors: Yves Melin; Julie Vaughan; Isabel Fressynet; Jin Woo Kim and Anna Golouchko
Key elements
Deforestation: The Regulation provides a broad definition of the term ‘deforestation’ that covers “the conversion of forest to agricultural use, whether human-induced or not”. The European Parliament wanted this definition to also include the conversion of “other wooded land” and “other natural ecosystems”, such as grasslands, peatlands and wetlands but the final text did not include such reference. However, within one year of the entry into force of the Regulation, the Commission will conduct an impact assessment to determine whether to broaden the scope of the definition.
The term ‘agricultural use’ covers the use of land for the purpose of agriculture, including for agricultural plantations and set-aside agricultural areas, and for rearing livestock.
Covered products: The Regulation targets seven forest-risk commodities (relevant commodities) – cattle, cocoa, coffee, palm oil, rubber, soya and wood – as well as “relevant products” which are products that contain, have been fed with or have been made using the relevant commodities. Annex I of the Regulation provides a list of relevant products, identifying them by their EU Combined Nomenclature (CN) codes, per relevant commodities (e.g., leather, chocolate, furniture, etc.).
Covered activities: Three main activities are targeted by the Regulation: (i) the “placing” and “making available” of forest-risk commodities (relevant commodities) and their derived products (relevant products) on the EU market, (ii) exporting these products from the EU, or (iii) supplying in any way forest-risk commodities and their derived products for distribution, consumption or use on the Union market from non-EU businesses.
Requirements to access or exit the EU market: the relevant commodities and products may enter the EU market, or be exported from the EU, only if they meet the three following requirements:
(i) They are deforestation-free: this means that the commodities have not been produced on land that was subjected to deforestation after 31 December 2020 and the derived products do not contain, have not been fed with or have not been made using commodities produced on land that was subjected to deforestation after 31 December 2020. Products containing or made from wood must have been harvested from the forest without inducing forest degradation after 31 December 2020.
(ii) They have been produced in compliance with the relevant legislation of the country of production (i.e., the laws applicable in the country of production concerning the legal status of the area of production, including in terms of human rights protected under international law, and the principle of free, prior and informed consent – FPIC – as set out in the UN Declaration on the Rights of Indigenous Peoples).
(iii) They are covered by a due diligence statement.
Country benchmarking system: The Regulation establishes a three-tier classification system for the assessment of countries or parts thereof. For that purpose, Member States and third countries, or parts thereof, will be classified into the following risk categories: high-risk countries, low-risk countries, and standard-risk countries. Obligations for businesses and authorities will vary depending on the risk level of the country or region of production, ranging from simplified due diligence obligations for products originating from low-risk countries to enhanced scrutiny for high-risk countries.
So far, all countries have been assigned a standard level of risk, but the Commission will publish, by means of implementing acts to be adopted no later than 18 months after the entry into force of the Regulation, the lists of countries or parts thereof classified as low-risk and high-risk countries. The main criteria considered by the Commission when classifying countries as low-risk or high-risk are the rate of deforestation and forest degradation; the rate of expansion of agricultural land for relevant commodities; and the production trends of relevant commodities and of relevant products. The list will be reviewed and updated, if appropriate, as often as necessary considering new evidence.
Implementation and due diligence obligations: Prior to placing the relevant products on the market or exporting them, operators must exercise due diligence regarding all relevant products supplied by each individual supplier. To do so, operators must (i) collect information, data, and documents; (ii) perform a risk assessment; and (iii) have risk mitigation measures in place.
First, operators must collect information, documents, and data (e.g., description of the product; quantity; country of production; geolocation of all plots of land where the relevant commodities that the relevant product contains, or has been made using, were produced, etc.) to demonstrate that the relevant product meets all the necessary criteria to enter or exit the EU.
Then, operators are required to verify and analyse the information collected, as operators must be able to demonstrate that there is no or only a negligible risk that the relevant products are non-compliant.
Finally, operators must adopt risk mitigation procedures and measures that are adequate to achieve no or only negligible risk, such as requiring additional information; carrying out independent surveys or audits; or supporting compliance of the operators’ suppliers, in particular smallholders, through capacity building and investments.
Businesses along the supply chain, such as those involved in the distribution, consumption or use of the relevant commodities and products, will also face compliance requirements. In case of a non-EU person making the relevant products available on the EU market, the first EU-established person that buys or takes possession of such products from the non-EU business will be considered as the operator subject to compliance requirements under the Regulation.
Simplified due diligence: The Regulation introduces a simplified due diligence procedure, which exempts operators from doing a risk assessment and having risk mitigation procedures if they are able to demonstrate that the relevant commodities and products have been produced in countries or parts thereof that are classified as low risk. In such cases, operators may be invited to make available upon request all the relevant documentation demonstrating that there is a negligible risk of circumvention of the Regulation or of mixing with products of unknown origin or origin in high-risk or standard-risk countries or parts thereof.
Penalties: In case of non-compliance, operators and traders will be subject to penalties set by Member States, which the Regulation requires to be effective, proportionate, and dissuasive. Penalties must include fines that are proportionate to the environmental damage, with the maximum amount being at least 4% of the annual Union-wide turnover of the operator or trader in case they are a legal person; confiscation of the relevant products concerned or the revenues gained from the transaction; temporary exclusion from public procurement processes, and from the EU market in the event of serious infringement; and prohibition from exercising the simplified due diligence.
To bring awareness and accountability, final judgments against legal persons for the infringement of the Regulation, as well as sanctions imposed on them, will be publicly available on the Commission’s website.
Implications for businesses: Once the Regulation enters into force, affected companies will be required to establish adequate policies and control mechanisms and to appoint a compliance officer at the management level. In addition, they will be required to collect a wide range of information on the commodities and derived products, including the geolocation of the land where the commodities were produced. With the information collected, concerned companies are advised to carry out annual risk assessments, take risk mitigation measures and submit their completed due diligence statements to national competent authorities, noting that their data will be publicly available on an anonymised basis.
Looking ahead
The Regulation was published in the Official Journal on 9 June 2023 and will enter into force on 29 June 2023. The obligations on operators and traders will become applicable within 18 months for large companies and 24 months for small and medium-sized enterprises.
Upcoming UK deforestation due diligence regime
The UK is also preparing a deforestation due diligence regime. Draft regulations are expected to be issued in 2023 following on from a government consultation run in late 2021. The proposed UK scheme differs from the EU Regulation in certain important respects:
(i) Rather than preventing products being marketed in or imported into the UK, the UK proposes to ban companies from using them unless it can be shown that they were legally obtained in the source country.
(ii) Compliance is however required with a much smaller spectrum of laws than under the EU Regulation (just those concerning land use, ownership and deforestation and not for example including wider issues such as human rights).
(iii) Where local laws set a low bar, there will be no additional hurdle for UK companies to demonstrate that the goods they are purchasing do not cause deforestation.
(iv) The proposed UK rules concern the risk of turning forest into agricultural land and may not additionally cover the risk of degradation of natural forests, contrary to the EU Regulation.
(v) Unlike the EU Regulation the UK regime will apply to maize, but it will not replace the provisions of the existing UK Timber Regulation that continue to apply in the UK post Brexit, while the EU Timber Regulation will be repealed by the new EU Regulation.
(vi) The UK scheme may begin with a few of the key commodities identified and expand to include the others over time.
(vii) There will be an exemption for the use of only small amounts.
Subject scope: The UK scheme will target “large” companies determined by their turnover (most likely that of the previous financial year) and their subsidiaries. Turnover thresholds of £50 million, £100 million or £200 million are under consideration. Companies that fall within scope for the UK scheme will have to undertake due diligence to assess the risk that the products they are sourcing have been illegally obtained and to mitigate that risk. In that respect it is similar to the EU Regulation.
Risk reduction purpose: The level to which risks must be reduced will either be negligible (which would help align the two systems) or a level that is as low as reasonably practicable, which is a concept borrowed from UK health and safety law. Guidance is expected to be issued to accompany the new regulations. There remains the prospect however that businesses with bases in both the EU and UK will find themselves having to satisfy two quite different sets of obligations.
Mandatory supply chain due diligence beyond deforestation
Various supply chain due diligence schemes already govern the placing of goods on the EU market, and several more are currently being adopted by the EU. In the context of the EU Green Deal, in May, the EU adopted the Carbon Border Adjustment Mechanism. The EU is also currently working on a Forced Labour Regulation, a supply chain due diligence directive and a batteries regulation. Other supply chain due diligence schemes are already in force, including the Conflict Minerals Regulation, covering tin, tungsten, tantalum, and gold (since January 2021) and the Kimberley Process for certifying conflict diamonds (since December 2002). All of these schemes have one important thing in common: they all require importers to know how the products they place on the EU market have been manufactured and be able to present documentary evidence to demonstrate it, to be obtained from suppliers or from the suppliers’ own suppliers.
This article was initially published by Reed Smith LLP – here.