The EU’s Deforestation Regulation (EUDR) is a proposal no longer.
The EUDR is a significant opportunity for EU companies to play their part in combating the worst impacts of climate change. Companies that fail to prepare adequately for the impending regulation may suffer delays, fines, or a loss of market access.
Now the final text has been published, we sat down with Michael Rice from ClientEarth to discuss what it’s done well, where it could have done more and where it might go in the future.
For companies in the agricultural sector with long-tail supply chains, obtaining reliable data about environmental risks, such as deforestation, can be tricky. Especially when trying to get information at the farm level. New regulations such as the EU’s Regulation on Deforestation Free Products are placing even more emphasis on the need for companies to ensure their supply chains are deforestation free.
Given the large number of stakeholders involved, and the large areas of land that need to be checked for deforestation, there are many moving parts. Companies can be overloaded with information, and reliable data is key.
What was ClientEarth hoping to see in the final EUDR text?
MR: There are some really good elements to the text, though we would have liked it to be more ambitious and comprehensive. Broadly, we’re pleased with the mechanics of the Regulation. Most importantly, the regulation includes very clear and detailed provisions on supply chain due diligence, including a crucial requirement for supply chain traceability. We’re also pleased with the inclusion of legal obligations for big trading companies and large retailers. The enforcement framework is also clear, with well-defined obligations for member states and their competent authorities. Clearer standards mean better standardisation, a level playing field and a smoother path to a sustainable EU market.
We would have liked to see a broader environmental scope going beyond the conversion of forests, and including the financial sector. The Together4Forests website contains some collective position statements that list a number of big asks. We also wanted to see a standalone human rights requirement for internationally recognized rights of indigenous peoples – evidence shows that indigenous peoples are disproportionately impacted by land conversion for agriculture while being the best guardians of the world’s remaining forests. The Parliament had a fantastic position on human rights, but unfortunately the Commission and Council didn’t support the inclusion of this human rights requirement. A big win for us was that customs are also included in the enforcement framework, as most of these products came from outside the EU. In the same vein, the access to justice provision was a priority; EU companies, citizens, organisations or “anyone with a sufficient interest” can ask for better enforcement. However, the ability to use this provision can change by member state.
SATELLIGENCE: The “anyone with a sufficient interest” clause is crucial here, as it provides a mechanism for those outside the EU who are affected by deforestation to present their evidence in EU courts. This means indigenous forest defenders and smallholders who might otherwise be rendered voiceless because of their position in the supply chain can bring cases to the EU should companies fail in their due diligence obligations.
There is going to be a review of the legislation in a few years, what changes might you realistically expect to be on the agenda?
MR: Many things the Parliament wanted but couldn’t get went into the review clause. Within one year, the Commission is obliged to carry out an impact assessment of extending the scope to include ‘other wooded land’, which basically sits between forest and grasslands. Within two years, there will be an impact assessment to extend the scope to include other natural ecosystems, such as the conversion of peatland, mangrove or wetland into agricultural production. It also includes a review of the commodity scope. There will also be a review of applying similar obligations to the financial sector. Finally, the list of products to which the law applies will be considered. The five-year review will also look at the impact on smallholders and indigenous peoples.
What are the main legal ramifications of the EUDR for companies?
MR: The main legal risk is that their products are restricted from the EU market. Under the EUDR, compliance and market participation are inextricably linked. There will be penalties where operators are found to have non-compliant products, and have carried out the due diligence processes improperly.
SATELLIGENCE: Doubts about the quality of due diligence will cause problems for operators, creating holdups at customs while documentation is checked. This means that, even if nothing is found to be awry, a company might lose revenue if their reporting isn’t clear enough. A company’s reporting can only be as comprehensive as their knowledge of their supply chains, so transparency is key in allowing their products smooth passage into the EU.
MR: For late adopters of supply chain transparency, end to end traceability of their products is a big ask. Large and medium-sized operators will have 18 months from the date of entry into force, and small and micro-enterprises will have 24 months to implement these requirements. That may seem like a long time, but for large companies trading globally with long or complex supply chains, transitioning to compliance where little effort has already been made could be challenging. It’s concerning that some big industry groups who have been claiming to have had strong sustainability policies in place for some time are now calling for tailored guidance on how to achieve deforestation-free supply chains.
The benchmarking system remains a bit of a mystery with the Commission keeping this somewhat under wraps, how should it work?
MR: I have some sympathy for the Commission here. When they proposed the benchmarking component it was mainly intended as a mechanism where they could engage with third countries, under a formal process, to discuss issues related to deforestation, such as land tenure and forest governance reforms, sustainable agriculture production, etc. but without an obligation to actually benchmark countries. Originally, it was about engagement. The Parliament and Council then put a time limit on the Commission to complete the benchmarking process, which means they need to carry out the benchmarking exercise in full, rather than use it as only an engagement tool. In order for this not to become a diplomatic minefield, the Commission will need to follow reliable, objective and independent data.
For products from high risk areas a higher percentage of imported products will need to be checked by customs, which is a logical safety mechanism. Although the minimum requirements for checks are lower than what even the Commission wanted. However, we’re happy that a minimum requirement for checks on products from low risk countries was also maintained, as this is an important deterrent against companies simply re-routing products through low risk countries to avoid more stringent checks.
Some sectors of industry have criticised the EUDR for potentially creating a two-tier regime that might exclude smallholders that can’t implement the traceability requirements. How do you feel about this argument?
MR: This is a legitimate concern that affects many sectors, particularly palm oil and cocoa, where a significant share of producers are small family farmers; over 90% of cocoa is produced on family-run farms. It has been challenging to balance the need for robust cross-commodity standards for EU companies in the legislation with risks of potential negative consequences for small farmers in their supply chains.
We are, however, wary of the narrative that this regulation will force smallholders out of EU supply chains. That’s not true. The Regulation doesn’t require this. If smallholders are ‘pushed out’ of EU supply chains, that would primarily be a consequence of decisions made by European companies. As noted above, EU companies will have at least 18 months to identify and engage with any smallholders in their supply chains to prepare for the new traceability requirements.
Sustainability schemes in the palm oil, cocoa and coffee sectors, in which most European companies in those sectors participate, already require commitments around supporting smallholders. In practice, though, smallholder producers are still typically the most vulnerable participants in these supply chains, with a small number of large multinationals in the middle and downstream ends where the vast majority of value goes. While some sectors have been making genuine efforts to support smallholders, this is not common practice. EU buyers need to do more if they are serious about their commitments to fair pricing and fair social standards in their business relationships and supply chains.
While there may be genuine concerns about the potential impacts on smallholders, there are also potential benefits. A group of smallholder cocoa farmer organisations in Cote d’Ivoire and the largest palm oil smallholders association in Indonesia have both shown their support in open letters in favour of the Regulation and the traceability requirements. They expressed similar views that the Regulation could increase smallholder visibility in the supply chain, create pressure to cut out middlemen, and give them more leverage to negotiate with their direct buyers, therefore getting a better price for their products and a fairer share of the value distributed along the supply chain.
Another industry concern is that they have already implemented certification schemes and should be allowed to use them to comply, do you agree?
MR: Companies will remain free to use certification schemes if they want. The point is that they should not be able to outsource their legal obligations and should remain responsible for the compliance of their products with the legal requirements, whether they have been certified by a third party scheme or not. Certification shouldn’t be treated as evidence of compliance. Where competent authorities aren’t able to exercise full traceability checks and rely on certification as a proxy for legal compliance, they risk creating a de facto ‘green lane’ for certified products while third party certificates are known to be unreliable.
There is a litany of evidence to show that certification is not always credible, so we’re pleased that the legal requirements of the Regulation supersede third-party certification. This doesn’t mean certification schemes have to disappear. If anything, the Regulation will create business opportunities for certifiers by creating more interest in schemes that can support EU operators to achieve compliance.
What do you think the potential benefits are of remote sensing technology to help companies comply?
MR: The deforestation-free requirement can, more or less, be checked with a laptop now. If one knows the geolocation coordinates of their supplier base, they could run that through a whole range of existing satellite monitoring platforms. That’s just another reason why claims that the Regulation would raise the cost of food products in Europe are not true. Based on what we’ve heard from experts, the cost of satellite monitoring is almost negligible when compared with manual checks, and can be highly accurate, so access and cost of the technology is not a challenge.
What will be more complicated is verifying legal compliance, which requires deeper investigation into the supply chain and jurisdiction of production. We foresee most companies having difficulty with checking fully for legal compliance, as it requires knowledge of local laws and what they require, and is dependent on the availability and reliability of formal documentation and ancillary data from credible stakeholders active in the ‘first mile’ of the supply chain, like smallholder networks, labour unions, community monitoring groups, civil society organisations, as well as environmental and industry regulators.
SATELLIGENCE: Since 2016, Satelligence has been on a mission to make sustainable agriculture mainstream. Today, Satelligence monitors over 6bn hectares of land for the world’s largest companies to help them calculate their carbon footprint, reduce their scope 3 emissions, halt deforestation and comply with sustainability regulations.