EU Deforestation Regulation: considerations for commodities traders

The EU Regulation on deforestation-free products (EUDR) came into force on 29 June 2023. While the EUDR has an 18-month implementation period for operators and traders that come within its scope, those affected are recommended to start preparing now to ensure that they are compliant when the time comes.

The EUDR aims to promote the consumption of ‘deforestation-free’ products and reduce the EU’s impact on global deforestation and forest degradation. In doing so, it is expected to reduce greenhouse gas emissions and global biodiversity loss. It, therefore, reflects the ongoing worldwide initiative to tackle climate change.

In essence, the objective is to prevent the import to and export from the EU of commodities (and products derived from them) linked with deforestation and forest degradation. 

This article summarises the key provisions of the EUDR, highlights similar UK and US legislation and considers some issues arising for commodities operators and traders and others affected by the new rules.

EUDR

The EUDR is part of a wider EU commitment to tackle deforestation and forest degradation that has been confirmed by, among other things, the European Green Deal and the EU Biodiversity Strategy for 2030. 

The European Commission states that the EUDR aims to:

1. address all deforestation driven by agricultural expansion to produce the relevant commodities;
2. reduce carbon emissions caused by EU consumption and production of the relevant commodities by at least 32 million tonnes a year; and
3. prevent the relevant products that are bought, used and consumed in the EU from contributing to deforestation and forest degradation both in the EU and globally.

What does the EUDR apply to?

It applies to the following commodities: cattle, cocoa, coffee, oil palm, rubber, soya and wood. It also applies to products that contain, have been fed or have been made with these commodities. By way of example, cocoa-related products include cocoa butter, cocoa powder and chocolate.

What is prohibited?

The relevant commodities and products cannot be supplied to the EU market or exported from the EU unless: (i) they are deforestation-free; (ii) they have been produced in accordance with the relevant legislation of the country of production; and (iii) they are covered by a due diligence statement.

Who does the EUDR apply to?

The Regulation applies to operators and traders. Operator means any individual or company or business that places the relevant products on the EU market or exports them in the course of a commercial activity. ‘Placing on the market’ means ‘first making available’ the relevant commodity or product on the EU market.

Trader means any person in the supply chain other than the operator who, in the course of a commercial activity, makes the relevant product available on the EU market. ‘Making available’ means supplying the relevant product for distribution, consumption or use on the EU market.

What are the obligations?

An operator is required to exercise due diligence to ensure that it does not import or export prohibited products ie those that originate from land deforested on or after 31 December 2020 or have contributed to forest degradation. The operator must provide a due diligence statement in advance to the competent authorities (to be designated by Member States) and must not import or export products where they are non-compliant or where there is a non-negligible risk that they are non-compliant or where it has not been possible to do due diligence on the products.

An operator must also pass on to other operators and traders along the supply chain all information necessary to demonstrate that due diligence has been done. This may in principle excuse those further down the supply chain from producing their own due diligence statement.

SME traders must ensure they have the relevant information that substantiates a due diligence statement. Both operators and SME traders must keep the relevant information available for a period of five years and if they become aware of any new information indicating concerns that any imported/exported commodity or product is non-compliant, they should inform the competent authorities.

Furthermore, while the operator or trader can delegate the submission of a due diligence statement on their behalf to an authorised representative, the operator/trader remains responsible for the product’s compliance (and the accuracy of the due diligence statement).

Due diligence

This includes: 

• collecting relevant information, data and documents; 
• risk assessment measures; and 
• risk mitigation measures. 

The EUDR gives significant detail on what these measures require and operators/traders should review the relevant provisions (Articles 8 to 13) carefully, together with the FAQ issued by the European Commission. 

In summary, however, the information requirements include among other things: 

• description and quantity of product;
• country of production;
• geolocation of all plots of land where commodities were produced;
• details of individual or entity that has supplied the product;
• details of individual or entity to whom the product is supplied;
• conclusive and verifiable information that the products are deforestation-free; and
• conclusive and verifiable information that the relevant commodities have been produced in accordance with the relevant legislation of the country of production.

Risk assessment covers a multitude of factors, including: 

• risks relating to the relevant country of production (including any concerns as to corruption, data and document falsification and lack of law enforcement in that country);
• prevalence of deforestation or forest degradation in that country;
• the complexity of the relevant supply chain and the stage of processing of the relevant products; and 
• the risk of circumventing the EUDR by mixing the relevant products with other products of unknown origin.

Risk mitigation includes:

• requiring additional documents, information or data; 
• carrying out independent surveys or audits; 
• having in place adequate and proportionate policies and procedures to mitigate and manage risk e.g. 
  • record-keeping;
  • internal control and compliance management; 
  • compliance officer; and 
  • an independent audit function to check internal processes and procedures.

In cases where commodities are sourced from areas classified as low risk, there may potentially be an option to undertake simplified due diligence.

Non-compliance

Member States are required to carry out checks to ensure that the EUDR is being properly implemented. Where non-compliance is detected, the Member State must implement corrective action to ensure that non-compliance is rectified, the non-compliant product is prevented from entering into or being exported from the EU, any non-compliant product is withdrawn from the market and non-compliant products are donated or disposed of. 

A Member State must also impose a range of effective, proportionate and dissuasive penalties for non-compliance, including fines, confiscation of non-compliant products, temporary exclusion for a maximum period of 12 months from public procurement processes and from access to public funding and a temporary prohibition on exporting/importing commodities, 

UK Environment Act 

The UK Environment Act 2021 (the Act) includes due diligence provisions designed to reduce the UK’s role in global deforestation. The Act makes it illegal for certain companies operating in the UK to use forest-risk commodities and derived products that have been produced on land that has been illegally converted or occupied. It, therefore, aims to prevent products associated with illegal deforestation or land conversion from entering the UK market. On 9 December 2023, at COP28 and as part of the Forest Risk Commodities Scheme, the UK Government confirmed that the regulated commodities under the Act are cattle products (beef and leather), soy, oil palm and cocoa. 

The Act will apply to companies that have at least £50 million in global turnover and that use more than 500 tonnes of a regulated commodity in their operations. Breach of the regulations will result in significant financial penalties. Therefore, affected companies must undertake due diligence in their supply chains to assess and mitigate the risk that relevant local laws were not complied with to produce the commodities they use, and make a declaration to this effect.

Secondary legislation to implement the Act’s provisions, including the scope of due diligence obligations, is at time of writing still awaited. In the meantime, there have been calls for UK due diligence obligations to be aligned with those in the EUDR and similar legislation implemented by other consumer countries.

The US is also reportedly planning to enact the FOREST (Fostering Overseas Rule of Law and Environmentally Sound Trade) Act which was reintroduced into the relevant legislative process on 5 December 2023.

Industry response

The new regulations clearly have significant costs implications for operators and traders. Nonetheless, there are both legal and reputational risks associated with non-compliance. Furthermore, those whose economic interests require them to continue engaging with the EU market may have no choice but to comply if they are not to be shut out.

In September 2022, a policy brief from NewGo! (New Ways for Forest Governance), part of the European Forest Institute’s (EFI) Governance Programme considered how commodities traders may respond to the EUDR. It consulted with cocoa, palm oil and soy traders, as well as supply chain consultants and NGOs.

The potential strategies available to commodities traders include:

• undertaking due diligence with current suppliers;
• reducing supply to the EU;
• sourcing from low-risk areas;
• substituting other commodities; and
• adapting supply base.

The report concluded that traders were not expected to cease or reduce supply to the EU or shift their business to other commodities because they benefited from and were invested in trading with the EU. Instead, traders were likely to implement the due diligence requirements with at least some of their existing suppliers. However, as due diligence and full traceability were challenging and costly, traders would probably segregate their supply chains. The EU (and UK and US) would be supplied with deforestation-free, legally produced and traceable products while non-compliant commodities would be redirected to other markets. 

While this diversion of non-compliant products to other markets might arguably have the potential to reduce the impact of the EUDR and similar legislation, the reality is that global commodities traders understand that consumers expect their supply chains to comply with ESG goals. Indeed, a number of international commodities traders are reported to have committed to zero deforestation in their supply chains. 

Furthermore, according to a report published by S & P Global in August 2023, “Global impact of the EU’s anti-deforestation law”, the EUDR is expected to reconfigure trade and supply chains across deforestation-linked commodities over the next decade. Its impact will probably be felt across major palm oil-producing countries in Asia such as Indonesia and Malaysia, in the agribusiness industries of countries such as Brazil and Argentina, and across EU-bound cocoa exports from countries such as Côte d’Ivoire and Ghana.

Some contractual considerations

Commodities trading associations for relevant commodities may wish to consider whether their existing standard form contracts should be revised to take into account the EUDR and other similar anti-deforestation legislation. An example of the type of provisions that may be appropriate for these purposes can be seen in GAFTA Addendum no.87 for organic goods to be imported into the EU, which sets out requirements regarding certification, traceability and labelling.

Commodities traders entering into bespoke sale contracts are recommended to consider carefully whether and what express provisions they should incorporate to take into account compliance with the EUDR and similar regulations. 

While sale contracts that are governed by English law will be subject to the Sale of Goods Act 1979 implied terms as to satisfactory quality and fitness for purpose, a FOB seller will not be responsible for matters affecting the saleability of otherwise perfectly satisfactory goods. Therefore, a buyer who finds it has bought goods that cannot be used or sold in the EU may be left bearing the resulting losses if express provision for such eventualities has not been made in the sale contract.

Furthermore, a seller that comes within the definition of ‘operator’ or ‘trader’ under the EUDR will have to comply with its requirements, irrespective of whether or not it has any liability to its buyer. This will be the case, for example, where a seller that is deemed to be a trader under the EUDR sells a commodity or a product to a buyer that has made it clear the goods are destined for the EU.

Consequently, it may benefit both parties to negotiate express wording that allocates risk for EUDR compliance in their sale contract from the outset. 

This article was written with the assistance of senior associate, Jennifer Hardy.

Hill Dickinson has been advising on the EUDR and its implications. In the event of any query, please contact us for assistance.