Background

The Deforestation Regulation forms part of the European Green Deal initiative and aims to ensure that EU consumption does not contribute to global deforestation and forest degradation arising from agricultural expansion linked to the relevant commodities.

The driving force for the Deforestation Regulation is the current rate of deforestation and degradation. According to EU sources, from 1990 to 2020 the world has lost 420 million hectares of forest, with EU consumption estimated as causing 10% of these losses. This Regulation aims to guarantee EU consumers that products bought on the EU market do not contribute to global deforestation and forest degradation.

Scope of the Regulation

The Deforestation Regulation repeals and replaces the existing due diligence regime created by the EU Timber Regulation (995/2010/EU) which applied to timber and certain types of timber products. The new Regulation is not limited to timber and so has a much broader scope, capturing other commodities associated with deforestation, such as cattle, cocoa, coffee, palm-oil, rubber, and soya. The Regulation applies to a specified list of derived products (set out in its Annex I) that are manufactured from the above commodities including beef, leather, chocolate, furniture, palm-oil derivatives and many paper-based products.

Businesses, either operators or traders, that make available relevant products on the EU market (or export them) will be required to ensure that products are 'deforestation-free'. Operators are defined as entities who place relevant products on the EU market (including through use in the course of a commercial activity) or export them. Traders are any entities in the supply chain, other than the operator, who make relevant products available on the EU market (again, including through use in the course of a commercial activity). Note, SME traders will be subject to record-keeping obligations rather than being required to undertake due diligence.

Due diligence requirements

The new Regulation enhances and expands on the existing due diligence framework that previously applied to timber products. Businesses will need to undertake due diligence to ascertain whether in-scope products are 'deforestation-free' meaning that they have been produced on land that has neither been deforested after the 31 December 2020 cut-off date, nor that has seen primary and naturally growing forests converted into plantations. Further, products must have been produced in compliance with all applicable and relevant laws in force in the country of production. The risk assessment undertaken will have to show that there is no, or only a negligible, risk that the relevant products are non-compliant.

Businesses will be required to create a due diligence statement in a newly created "Information System" confirming that the relevant checks have been undertaken and identifying the specific geolocation of all plots of land where the relevant commodities were produced to help facilitate compliance checks. In doing so businesses will be able to refer to due diligence statements prepared by upstream suppliers.

The extent of the due diligence checks required are based on a benchmarking system to be adopted by the EU Commission that will assess countries (or parts thereof) to determine the level of risk of deforestation and forest degradation.

Penalties

Penalties will be established at Member State level with non-compliance with the Regulation potentially leading to products being confiscated and access being denied to the EU market. Fines can also be issued, with the maximum fine corresponding to at least 4% of total annual turnover in the EU.

Business impact

The impact of the Deforestation Regulation will primarily be felt by businesses that supply relevant products on the EU market or export them, with the key sectors affected by the Regulation including retail, food/beverage, apparel, automotive, life-sciences, biofuels, paints and coatings, and cosmetics.

To comply with the Regulation, businesses will need to ensure that they have due diligence processes in place that include information gathering, risk assessment, and risk mitigation measures. Businesses will also need to put in place appropriate processes to ensure that signed due diligence statements can be prepared in respect of all shipments and submitted to the Information System.

This Regulation sits alongside a growing number of regulations and proposals in the EU aimed at requiring companies to take greater responsibility for the impact on human rights and the environment of their extended supply or value chains, including the Commission's proposed Corporate Sustainability Due Diligence Directive and Regulation Prohibiting Products made with Forced Labour.

The UK has also committed to addressing deforestation with the adoption of the "Forest Risk Commodities" regime under the Environment Act 2021. Similar to the EU Regulation, the Act aims to tackle deforestation and protect forests by prohibiting certain commodities connected with illegal deforestation and requiring businesses to conduct robust due diligence. However, secondary legislation to implement these requirements in the UK still needs to be adopted.

Additional Resources

You can access a recording of our recent webinar on the Regulation here.