Deforestation-free supply chains: EU draft hints at new requirements for economic operators

The increased awareness of sustainability and climate protection has stepped up the pressure to introduce product-related due diligence obligations to comprehensively protect the ecosystem. One key aspect of this is the increasingly uncontrolled deforestation and degradation of forests worldwide. Forests are felled to make way for the extraction of raw materials and the production of certain consumer goods. The consequences include topsoil erosion, the loss of trees as carbon sinks, and the loss of biodiversity.

The EU Commission therefore published a proposal for a Regulation on deforestation-free products in the Official Journal of the EU on 17 November 2021, which goes far beyond existing European measures against deforestation and forest degradation. The Regulation aims to reduce the EU’s contribution to deforestation and forest degradation in global supply chains. Product compliance then extends to production – similar to the EU Conflict Minerals Regulation and the German Supply Chain Sourcing Obligations Act.

The proposed Regulation contains the following provisions:

Raw materials and products covered

The proposed Regulation covers particularly forest- and climate-harming raw material productions such as soy, wood, coffee, cocoa, beef and palm oil (“relevant raw materials”) including certain products for which the relevant raw materials are frequently used (“relevant products”).

Definition of the term “deforestation-free”

The linchpin of the proposed Regulation is the definition of the term “deforestation-free”. Relevant raw materials and products are thus to be assessed as deforestation-free if they do not originate from areas that were deforested after 31 December 2020 or that were the scene of forest degradation after this date. In the proposed Regulation, the term deforestation means the conversion of forest into agricultural land.

Restrictions in the supply chain

In order to reduce the EU’s contribution to deforestation and forest degradation in global supply chains, relevant raw materials and products should only be placed or made available on the Union market or exported from the Union market if they

• are deforestation-free,
  
  
• have been produced in accordance with the laws of the country of production,
  
  
• and are covered by a due diligence declaration.
  
  

Due diligence obligations of economic operators

In order to ensure conformity with the requirements for placing relevant raw materials and products on the market, the proposed Regulation provides for the following due diligence obligations for economic operators:

1. Collection of information on relevant raw materials and products:
   
   
   • Quantity of relevant raw materials and products
     
     
   • Geolocation coordinates of the areas where the relevant raw materials and products are produced
     
     
   • Date or time period of production
     
     
   • Contact details of companies in the supply chain
     
     
   • Verifiable information that the relevant raw materials and products are deforestation-free and that their production complies with the relevant legislation of the country of production.

2. On the basis of this information: Perform regular and documented analysis and classification of the risk that the relevant raw materials and products do not meet the conformity requirements.
   
   
3. Where appropriate: Take adequate and proportionate risk mitigation measures.

By making their due diligence declaration, economic operators take responsibility for ensuring that due diligence obligations have been met and that there is no or only a negligible risk that the relevant raw materials and products are not deforestation-free or have not been produced in accordance with the laws of the country of production. The due diligence declaration should be submitted by economic operators to the competent authorities in an information system or register specifically provided for by the proposed Regulation.

Benchmarking system

In addition, the proposed Regulation provides for varying degrees of due diligence on the part of economic operators, depending on the assessment of the level of risk in the country or region of origin of producing relevant raw materials or products that are not deforestation-free or do not comply with national laws. The risk categories are to be determined with the help of a benchmarking system based on certain assessment criteria set out in the Regulation, such as the deforestation rate of a country.

Retention and reporting obligations

Economic operators will have to keep their due diligence records for at least five years and report annually in full to the public on the measures they have taken to comply with their due diligence obligations.

Notification obligation

Finally, the proposed Regulation contains a notification obligation for economic operators if there is reason to believe that relevant raw materials and products they have already placed on the market or made available on the market or exported do not comply with the requirements of the Regulation.

Penalties

In the event of breaches of the planned obligations, the proposed Regulation provides for enormous fines to be imposed and for the confiscation of the raw materials in breach of the Regulation or the resulting proceeds. In addition, economic operators may be temporarily excluded from public procurement in the event of breaches.