Deforestation and forest degradation contribute to the global climate crisis in many ways. Together, they increase greenhouse gas emissions through associated forest fires, permanently remove carbon storage capacity, reduce the resilience of the area concerned with climate change, and significantly reduce its biodiversity and resistance to disease and harmful organisms.
This is also why the topic of forest protection is the focus of another recent legislative act in the EU ESG legislative package, Regulation (EU) 2023/1115 of the European Parliament and of the Council of 31 May 2023 on the supply to and export from the Union of certain commodities and products related to deforestation and forest degradation and repealing Regulation (EU) No 995/2010 – the so-called Deforestation Regulation or EUDR (hereinafter the „EUDR“).
EUDR objectives and proposals
The EUDR was adopted to firmly define and set out the obligations and requirements to be met by companies marketing and/or supplying to the EU market or exporting outside the EU certain commodities or products containing such commodities.
The main objectives of the Regulation are:
- Minimising the EU’s contribution to deforestation and forest degradation: the EUDR seeks to reduce global deforestation by preventing access to the EU market for products and commodities that cause deforestation.
- Protecting biodiversity: forests are home to many endangered species and the conservation of these ecosystems is key to protecting global biodiversity.
- Reducing greenhouse gas emissions: deforestation contributes to the increase in the concentration of greenhouse gases in the atmosphere. By reducing deforestation, the EU wants to contribute to its climate goals.
Relevant commodities and new requirements
The scope of the EUDR applies to so-called relevant products that contain, have been fed with, or have been produced using relevant commodities, e.g. These commodities are cattle, cocoa, coffee, oil palm, rubber, soya, and wood.
The Regulation provides that relevant commodities and relevant products may not be placed on the market, supplied, or exported unless the following conditions are met (cumulatively):
i. do not cause deforestation,
ii. have been produced in accordance with the relevant legislation of the country of production; and
iii. are covered by a due diligence declaration.
The new EUDR obligations will affect all entities that:
i. place relevant commodities or products on the European Union market,
ii. supply them for distribution or consumption within the EU, or
iii. export them outside the EU.
This applies to importers, distributors, and exporters of these products.
The extent of the obligations, such as establishing a due diligence system or maintaining information on the origin of commodities, will depend on the size of the company and its role in the supply chain. All companies will therefore need to ensure that their products meet strict criteria regarding forest protection and related legislation in the production countries.
Effectiveness of EUDR and sanctions for non-compliance
The Regulation was already adopted on 31 May 2023, entered into force on 29 June 2023, and has so far been scheduled to take effect in two waves – from 30 December 2024 the first obligations for large and medium-sized enterprises and from 30 June 2025 for small enterprises. However, following pressure from the professional community and several Member States who asked for a delay in the entry into force due to the scale of the obligations and the need for more time to prepare for compliance for the affected entities, the European Commission put forward a proposal in early October to postpone the entry into force across the board by 12 months.
If the deferral is approved, companies will have an additional year to implement the necessary due diligence systems and ensure that their business practices comply with the new requirements. This includes the obligation to keep evidence of the origin of commodities, their compliance with legislation and not causing deforestation.
In the event of non-compliance with EUDR obligations, companies can face significant penalties, including heavy financial penalties and bans on marketing their products on the EU market. Penalties will depend on the seriousness of the infringement, the size of the company, and its market position.
Impact of EUDR on the global market and sustainability
EUDR does not only bring changes for European companies but has a potentially global impact. Given the significant role of the European Union as one of the world’s largest markets, third-country companies will also be forced to adapt their production and business practices if they wish to continue to export their products to the EU. This pressure for transparency in supply chains may also contribute to changing business practices outside Europe, as companies start to favour sustainable agricultural practices and responsible forest management.
In addition to protecting forests, EUDR is expected to bring secondary benefits such as increasing corporate responsibility for their environmental and social impacts, an important step towards the overall sustainability of the global economy. Moreover, this legislation supports the EU’s broader objectives of a circular economy and achieving carbon neutrality by 2050, thus becoming part of a more comprehensive strategy to combat the climate crisis.
Implementation challenges and the need for global cooperation
The implementation of EUDR brings with it several practical challenges, in terms of traceability and transparency of supply chains. Many companies will need to invest in new technologies and systems to verify the origin of raw materials and ensure that their products meet EUDR criteria. Collaboration between businesses, governments, and NGOs at the global level will also be key to ensure that the changes adopted in the European Union lead to real reductions in deforestation in other parts of the world.
Conclusion
EUDR represents a key step in the European Union’s efforts to protect the world’s forests and combat global deforestation. By imposing strict requirements on the import, distribution, and export of products linked to commodities that contribute to deforestation, the European Union is sending a clear signal of its commitment to tackling climate change, reducing greenhouse gas emissions, and protecting biodiversity. Although the regulation has been temporarily delayed, its implementation will have a significant impact on global trade chains and will hopefully contribute to a more sustainable economy. If the postponement is approved, affected importers and exporters will have an additional year to prepare for compliance under the EUDR.
The text of the EUDR is available at the link here.
We will continue to monitor developments on ESG issues for you. If you have any questions about EUDR or related issues, please do not hesitate to contact us.
Mgr. Jakub Málek, managing partner – malek@plegal.cz
Rachel Kouklíková, legal assistant – kouklikova@plegal.cz
Tereza Hrudková, legal assistant – hrudkova@plegal.cz
17. 10. 2024