The European Parliament and Council announce progress made on proposed deforestation regulation

On 6 December 2022 the European Parliament and Council announced that they had reached political agreement[1] on a new regulation, first proposed by the European Commission in November 2021, aimed at “promoting the consumption of ‘deforestation-free’ products and reducing the EU’s impact on global deforestation and forest degradation” (the “Deforestation Regulation”).[2] 

Once in force, the Deforestation Regulation will prevent in-scope companies based in the EU from placing/making available on the market, or exporting, products which are linked to deforestation. The list of commodities capable of being caught by the Deforestation Regulation includes cattle, palm oil, soya, coffee, cocoa, wood, and rubber, along with “relevant products” such as chocolate and wooden furniture.

The Deforestation Regulation, which will replace the existing EU Timber Regulation, forms part of the EU’s “Forest Strategy for 2030”, and is one of several draft proposals relating to supply chain management currently being considered at the EU level (including, most notably, the draft Corporate Sustainability Due Diligence Directive (“CSDD”) – see our recent in-depth client briefing on the CSDD).

How will the Deforestation Regulation work?

The Deforestation Regulation aims to increase EU demand for “deforestation free” commodities and products, and to close existing loopholes of “legal deforestation”, thereby reducing deforestation connected with both (i) imported products purchased by European consumers and (ii) goods produced in the EU. The Deforestation Regulation also seeks to curb GHG emissions and prevent biodiversity loss. Consideration is also given to the human rights aspects linked to deforestation, including, for example, the rights of indigenous peoples and forest communities.

Under the Deforestation Regulation, commodities or products placed on the market by operators and/or traders must be shown to have not led to deforestation or forest degradation anywhere in the world after 31 December 2020. The Deforestation Regulation combines benchmarking and tiered mandatory due diligence processes, whereby the obligations for operators, traders and Member States’ authorities will vary according to the level of risk that the country of production represents. This approach is not dissimilar to the proposed “obligation of means” in the CSDD, in that both draft proposals aim to ensure that measures undertaken by businesses are proportionate in light of different impacts and risks.

Small operators can rely on larger operators to prepare due diligence declarations in certain circumstances, but they will retain responsibility for the compliance of the relevant product with the requirements of the Deforestation Regulation.

As part of discussions on the Deforestation Regulation, the European Parliament and Council considered whether obligations should be imposed on financial institutions (a position that the European Parliament was in favour of). In an open letter sent in November last year, a number of financial institutions indicated their support for doing so. However, as perhaps expected, a compromise position has now been reached, whereby the application of the Deforestation Regulation to financial institutions will be assessed following a review to be carried out within two years of the Deforestation Regulation coming into force.

Next steps

The European Parliament and Council must formally adopt the Deforestation Regulation before it can enter into force. Following this, in-scope companies will have 18 months to prepare to comply with the Deforestation Regulation.

Considerations for businesses

In its current form, the Deforestation Regulation will have a very broad application. Companies operating in the EU would be well-advised to review their supply chains and, where necessary, carry out due diligence to ascertain the provenance of any “relevant commodities” or “relevant products” as required by their business. Given the scope of the Deforestation Regulation, in-scope companies might want to consider whether they have the necessary internal expertise to grapple with any latent issues which may arise as part of any review exercise. In particular, understanding the impact of deforestation on the rights of indigenous peoples can be a multifaceted and complex exercise.

The penalties for failing to comply and take necessary corrective actions look set to be steep. Those companies which fall short of the requirements in the Deforestation Regulation face a potential fine amounting to a maximum of 4% of their annual turnover in the EU, possible confiscation of impacted goods and generated revenues, the prospect of temporary exclusion from public procurement processes and public grants and other funding and, in serious cases or for repeat infringements, prohibition on placing products on the EU market or exporting from out of the bloc.

Companies should also bear in mind the numerous other complementary proposals afoot at the EU-level, including the Commission’s forced labour proposal, which will require in-scope companies to carry-out due diligence on their supply chain. It appears increasingly likely that ever greater numbers of companies may be required to comply with one or a number of separate requirements in a fast-changing extranational compliance landscape.

[1] Regulation on deforestation-free products - Proposed Compromise Text - December 2022

[2] Regulation on deforestation-free products