The European Union Deforestation Regulation is one of the most significant initiatives that has ever been established for sustainable sourcing of raw materials. The EUDR is a law that restricts operators from placing products on or exported from the European Union (EU) market that are linked with deforestation or forest degradation. The key driver behind the regulation is to bring down greenhouse gas emissions and reduce biodiversity loss, resulting from the expansion of agricultural land that is linked to high impact commodities. “As a major economy and consumer of these commodities linked to deforestation and forest degradation, the EU is partly responsible for this problem and it wants to lead the way to solving it.” (https://environment.ec.europa.eu/topics/forests/deforestation/regulation-deforestation-free-products_en). Whilst the key aim of the EUDR is to reduce the impacts of deforestation from products sold in the EU market it is expected that the regulation will also result in an increased demand for globally deforestation free products. 

Who does the EUDR apply to?

The initial implementation of the EUDR will apply to the following raw commodities and any derived products that use these commodities:

• Palm Oil

• Cocoa

• Soy

• Coffee

• Wood

• Rubber

• Beef/Leather

The scope of the regulation applies to derived products sold in or from the EU that include any of the above listed raw commodities sourced anywhere in the world. 

Who is responsible for EUDR compliance?

The responsibility for the compliance lies with the operator (ie consumer packaged goods company) that first places a product in the EU market. Operators will ultimately be responsible for implementing the required due diligence and declarations. It is expected that this responsibility will then flow through to producers and traders to provide operators with a sufficient level of detail regarding the specific sourcing footprints for raw commodities. 

What are the potential penalties for EUDR non compliance?

The primary penalty for non-compliance is the restriction of EU market access. In addition to denying market access other penalties include:

• Fines of up to 4% of a company’s annual EU market revenue

• Exclusion from public procurement opportunities

• Confiscation of non compliant products

• Increased future due diligence requirements
   

How is deforestation defined?

The definition of forest area for the EUDR is based on the forest classification from the Food and Agriculture Organisation of the United Nations where forest is defined as woody vegetation with greater than 10% canopy cover of tree species and a height of over five meters. 

Deforestation is defined as the conversion of forested areas into agricultural use. Under the EUDR the conversion of forested area for non agricultural use (ie infrastructure urban development) is not applicable. Importantly there is no distinction for deforestation that is human induced so any conversion of forest area into agricultural use from natural disasters (ie forest fire) would still be under the scope of EUDR. This encourages the regeneration of forest areas following natural disasters.

An important distinction with the EUDR is that there is no exemption for deforestation that is determined to be legal in the country of production. This provides significantly more coverage as compared to the previous EU Timber Regulation (EUTR) and illegal logging regulations.

What are the key requirements?

The key requirement will be for an operator to establish a due diligence process that addresses the following key steps:

• Supply Chain Mapping | Collecting and assembling data from producers and traders that enables first mile verification of the sourcing footprints for applicable commodities

• Risk Assessment | Using the supply chain mapping data with Satellite Imagery and additional data sources to identify occurrence of deforestation

• Risk Mitigation | Where a risk assessment identifies more than negligible risk of non compliance an operator is required to carry out mitigation measures

The supply chain mapping process is a critical step that will transition operators from leveraging simple certification based reporting to more accurate verification based due diligence processes. The focus of this verification will be the requirement of the EUDR for operators to provide accurate coordinates for the farms, plantations and plots that are providing raw materials. For farms with an area of less than four hectares a minimum of a single coordinate is required. For any farm with a polygon defining the extents of the farm will be required. Establishments where cattle are kept can be described with a single coordinate. The truthfulness and precision of geospatial sourcing information is a requirement for both operators and traders.

Operators will be required to demonstrate what systems were used to gather information and perform the risk assessment as part of the due diligence process. Where a risk is identified, operators will need to have systems in place that will enable measures including supplier engagement, surveys and capacity building.

What are the risk based controls?

Under the EUDR not all locations will be treated equally in terms of due diligence requirements. The EU Commission will classify countries or locations as either low risk, standard risk or high risk. This risk classification will be based on an EU Commission and will determine both the level of detail required for due diligence as well as the level of audit checks to be performed. 

The simplified due diligence process for low risk countries will mean that operator will not have to perform the same level of risk assessment and risk mitigation however operators will still have to collect the same level of supply chain detail for low risk countries and will still need to have the capability to perform risk assessment or mitigation if a risk is identified.

What are the key dates?

Whilst there are many activities underway and planned for the implementation of EUDR there are a number of key dates that are know fixed:

• 31st December 2020 | Cut off date for deforestation

• 9th June 2023 | EUDR was published in the Official Journal of the European Union

• 30th December 2024 | Requirements and Prohibitions of the EUDR take effect (small enterprises have an additional 6 months)

• Future:

  • Commission to publish country assessment list

  • Commission to establish an information system for registration

  • Timber products that were previously covered by the EUTR to transition to the EUDR

How is Mass Balance addressed?

For companies leveraging mass balance sourcing (where materials become mixed during the shipping and manufacturing processes) the line from the EUDR is clear. If an operator is unable to verify the physical source of any material used then it would be considered to be non compliant. Commodities would need to be segregated at every step of the supply chain to separate from commodities of unknown origin.

How should a company address the EUDR?

Companies will require global, geospatial, data driven capability to effectively address the EUDR. With the evolution of the EUDR in the future companies will also need to adopt systems that can be extended and integrated into purchasing platforms to ensure the resilience of compliance capability. NGIS has developed TraceMark to directly address the key requirements of the EUDR:

• Supply Chain Mapping | Multi commodity data model that supports current and future EUDR commodities, geospatial driven supply chain mapping including data sharing capabilities between operators and suppliers. Global traceability capability including EUDR compliant spatial data.

• Due Diligence Reporting | EUDR specific reporting on key deforestation metrics extending from the cut off date to current day 

• Risk Assessment | EUDR tailored risk assessment capability including country based forest risk and the ability to overlay data regarding indigenous rights and governance risk (Article 10 of EUDR)

• Risk Mitigation | Specific reporting, record keeping and compliance management features including direct engagement with suppliers through TraceMark to build the capacity of suppliers with the delivery of geospatial supply chain data (Article 11 of EUDR)

TraceMark is a Google Cloud Ready – Sustainability Solution designed to implement the EUDR for enterprises, accelerating the delivery of traceability and transparency in global supply chains for raw materials.

References:

https://environment.ec.europa.eu/system/files/2023-06/FAQ%20-%20Deforestation%20Regulation_1.pdf

https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32023R1115&qid=1687867231461

https://www.europarl.europa.eu/news/en/press-room/20230414IPR80129/parliament-adopts-new-law-to-fight-global-deforestation