Global forests, as carbon sinks, play an important role in mitigating climate change by absorbing and storing greenhouse gases. The EU is a major consumer and trader of commodities that play an important role on deforestation and forest degradation, risking also their ecosystems worldwidely. To address these matters the EU has now taken a significant step forward by adopting the Deforestation Regulation.
The Regulation, which entered into force on Thursday 29 June 2023, aims to address the detrimental impacts of deforestation and forest degradation associated with the production of several commodities, such as soy, palm oil, beef (cattle), coffee, rubber, cocoa and wood. The rules also apply to a number of derivatives, such as chocolate, furniture, printed paper, selected palm oil derivatives (as components in personal care products) and tyres. Companies will now have 18 months to comply with the new rules. Micro and small enterprises will enjoy a longer adaptation period, as well as other specific provisions.
Scope and High-Level Impacts of the Regulation
The EU Deforestation Regulation is a comprehensive endeavour that seeks to combat the alarming rate of global deforestation and forest degradation. The impact on forest decline extends far beyond biodiversity concerns, as it contributes to climate change and it’s often associated with human rights violations, such as indigenous, land rights and labour rights. The EU recognizes the need to address these interconnected issues and aims to establish a regulatory framework that supports the implementation of social and environmental safeguards.
Obligations for Companies
The EU Deforestation Regulation requires companies to bear significant responsibilities to ensure compliance with forest-protection rules and contribute to sustainable trade practices. These obligations can be summarised as follow:
- Due Diligence Obligations: will be mandatory to companies who place, operate, trade and make available or export the aforementioned commodities and derivatives on or from the EU market, to ensure they are deforestation-free and that they have been produced in accordance with the legislation of the country of production. This involves conducting thorough risk assessments, mapping the origin of commodities, and assessing the environmental and social impacts of their procurement practices.
- Mandatory Traceability Systems: Companies will need to establish robust traceability systems to track and verify the sustainability credentials of the commodities they trade, and in order to trace their commodities to the plot of land where they were produced through geolocation technologies. In addition, all relevant goods imported or exported from the EU will have to be covered by a mandatory “due diligence statement” issued by the operator (i.e.,the entity that first places relevant products on the market or exports them) and made available to the customs authorities.
Note that the obligations may vary based on the size and nature of the company, as well as the specific requirements set forth in the Commission implementing acts.
The regulation set a cut-off date on 31 December 2020, meaning that only products from free-deforestation and forest degradation land counting from this date will be allowed on the EU market or to be exported from the EU.
The EU Timber Regulation that entered into force on 3 March 2013, will be repelled by the current deforestation regulation. The previous law focused on illegal timber and timber products and the current law expands and builds upon the existing due diligence framework.
Fines will be proportional to the environmental damage and the value of the relevant commodities or products. It should be of at least 4% of the operators’ annual turnover in the EU and can include a temporary exclusion from public procurement processes, and exclusion from access to public funding.
The Role of the Procurement and Custom Functions
By fulfilling these obligations, companies can demonstrate commitment to sustainable sourcing, mitigate reputational risks, and tap into the growing demand for responsible produced commodities. The procurement and custom organisations within companies play a critical role in implementing these obligations, collaborating with suppliers and custom brokers, and driving sustainable procurement practices across the supply chain.
Following the entry into force of the Deforestation Regulation, companies will have a limited time frame of only 18 months to assess the resilience of their supply chains, implement necessary due diligence procedures, review transfer pricing policies, and address other tax-related issues.
The EU Deforestation Regulation usher in a new era of sustainable global trade. Its broad scope will have far-reaching implications for companies involved in trading and manufacturing goods at risk of deforestation. This Regulation will disrupt global supply-chains and present new compliance challenges for the customs and procurement organisations. In response to these operational readjustments, the tax function will also have to review the group’s transfer pricing policy.
At PwC we can help you identify and prioritise the actions needed for legal compliance and to optimise your operational performance. If you want to know more, please reach out to our Sustainability experts (Alexis De Méyère, Caroline Schmidt, Helena Caluwé, Lorenzo Emiliano Costa) or your dedicated contact person.