EU Adopts Deforestation-Free Products Regulation

Days before the recent UN Biodiversity Conference (COP15), the European Parliament and the Council reached an agreement on the terms of a new Regulation on deforestation-free products. First initiated in 2021 within the Green Deal framework, this Regulation is part of a wider effort from the European legislator to regulate international supply chains (see our previous alert on the Corporate Sustainability Reporting Directive).

What is the scope of the Regulation on deforestation-free products?

The scope of the Regulation on deforestation-free products fills the gaps in the EU Timber Regulation and follows a similar pattern to the Corporate Sustainability Reporting Directive.

• High impact sectors targeted – Palm oil, beef, timber, coffee, cocoa, soy and rubber are subject to mandatory due diligence rules. These “relevant commodities and their products” (hereinafter “RC&P”) – for instance, chocolate is a cacao product – are prohibited from being placed on or exported from the Union market if they are not “deforestation-free,” meaning that (i) they were produced on land that has not been subject to deforestation, and (ii) the wood has been harvested from the forest without inducing forest degradation. They must also have been produced in accordance with the relevant legislation of the country of production and must be covered by a due diligence statement.
• Human rights protection – As deforestation is often linked to human rights violations, the scope of the Regulation has been broadened to include human rights obligations. Thus, RC&P must also have been produced in compliance with the relevant legislation of the country of production regarding human rights and the rights of indigenous peoples.
• Key definitions enshrined in law – For the first time, the European legislator defines what constitutes deforestation, which is considered to be “the conversion of forest to agricultural use, whether human-induced or not.” Forest degradation, which is a new notion, encompasses “harvesting operations that are not sustainable and cause a reduction or loss of the biological or economic productivity and complexity of forest ecosystems, resulting in the long-term reduction of the overall supply of benefits from forest, which includes wood, biodiversity and other products or services.”
• Larger groups responsible – For operators and non-SME traders, the obligations laid down by the Regulation are the same. The scope has indeed been widened compared to the EU Timber Regulation, and large traders’ obligations are no longer limited to traceability.

How does the Regulation’s due diligence mechanism work?

• Submission of the due diligence statement – A due diligence statement, confirming that due diligence has been carried out and showing no or only negligible risk, must be submitted to the competent authorities prior to placing RC&P on the Union market or exporting them outside the Union. Non-compliance, non-negligible risk of non-compliance or inability to complete a due diligence procedure is enough to prevent RC&P from being marketed or exported.
• Due diligence procedure – The Regulation sets out a three-step due diligence procedure regarding the due diligence statement.

- Information requirements – First, companies must fulfil the information requirements, by collecting the information listed in the Regulation (i.e., information that shows the RC&P are deforestation-free, geo-localization coordinates of all plots of land where the RC&P were produced, etc.). 

- Risk assessment – Then, they must assess the risk of dealing with non-compliant products using the criteria listed in the Regulation (the prevalence of deforestation or forest degradation in the country, region and area of production, whether a third party has submitted a substantiated concern, etc.) and according to the country benchmark analysis provided by the Commission. 

- Risk mitigation – Finally, operators and large traders must have model risk management policies and compliance management procedures in place (including a compliance officer at management level for non-SME operators). Non-SME operators must also have an independent audit function to check the internal policies, controls and procedures.

- In parallel, SME traders have lighter information requirements and no risk assessment or mitigation analysis to perform.

• De facto extraterritoriality – The first Union entity to have the RC&P in its possession is bound by the same obligations as the exporter of the RC&P. This means that Union importers must perform due diligence whenever they buy RC&P from a non-Union entity, regardless of whether the seller comes from a high-risk region or not. What matters is if the RC&P enter the Union market for the first time.
  
  This makes sense as not all products which enter legally a third country’s market would be considered deforestation-free under the EU Regulation. For example, in the United States, even if the draft US FOREST Act were to be adopted in its current form, American operators would still only have to assess the goods if they originated from illegally deforested lands whereas European operators must check that the goods do not originate from deforested lands. This is a significant difference, and Union entities should bear this in mind.