Deforestation-free regulation: here in December 2024
The EU's Deforestation Free Products Regulation (EU DR) enters into effect on 30 December 2024, from which point all targeted commodities (cattle, cocoa, coffee, palm oil, rubber, soya, wood) and derivative products entering the EU must not be produced on land that was deforested after 31 December 2020. While EU DR is official EU law, revisions are possible (similar to recent activity), though these would have to go through the formal legal process (usually 18-24 months). Reportedly, pressure from industry has led the European Commission to consider delaying identification of high and low risk regions, resulting in fewer checks for products from some countries.
It's complicated...
We believe the complexities of the legislation are not fully appreciated (we are still hearing from market participants who are not aware of the regulation). We think compliance with the rules, as they currently exist, will be complex, and the EU DR should be looked at in conjunction with other related supply chain legislation that aims to (among other goals) improve supply chain transparency & traceability. In scope, producers will be required to fully document supply chains, including opaque supply chains where products are often co-mingled or blended. Wherever a relevant product is placed on the EU market, in addition to the requirements under the due diligence statement, if operators reference someone else's due diligence statement, they have to ascertain that the statement was conducted appropriately, and subsequently take responsibility of the compliance of those products. This upends long-established supply chain practice of outsourcing responsibility for various compliance functions to third-party vendors.
Enforcement
Member States will set penalties, which must include a maximum fine of at least 4% of total annual Union-wide turnover, and confiscation of goods and related revenues, among others. Member States will be responsible for enforcement via Competent Authorities; we expect actual enforcement activity to be complicated by multiple factors. An additional consideration from a corporate perspective outside of regulatory enforcement would be advances in technology that enable greater scrutiny of supply chains; deforestation is an area of significant interest from a civil society perspective and we expect continued interest from non-governmental organizations (NGOs) and the press. As part of the legislation, Member States are required to investigate any substantiated claim of a product being in contravention of the law.
Conclusions: current efforts may not equal compliance
While we agree with the spirit and intended aims of the legislation, we believe compliance will be extremely complicated, and likely inflationary. In our view, EU DR requires a fundamental change to supply chain management, including making operators (not vendors) liable for compliance. While many Multinational Corporations (MNCs) have deforestation targets in place (and have reported progress towards those targets), we believe there may be a disconnect between the level of due diligence undertaken as part of internal targets versus the due diligence and disclosure requirements under the EU DR. We believe engagement could aid investors to better gauge risk.
