EU Deforestation Regulation, applicable to coffee, cocoa, soya, oil palm, rubber and timber value chains

Unlike the CBAM, this regulation is not strictly speaking a newly created EU tool: it builds on the previous Timber Regulation (995/2010) by extending it to other commodities and products and designing new instruments for its enforcement and monitoring. The new chains covered by the Deforestation Regulation stem from six commodities (coffee, cocoa, soya, oil palm, rubber, timber), and products derived from them (in the case of timber, the list of products has been extended in comparison with the Timber Regulation); their distribution  in, and from, the EU is prohibited if they do not comply with the provisions of the Regulation. There are no exemptions (neither geographical, nor by value or volume of goods, nor by size of economic operator, nor by legal form of operator), so its scope is very wide. In total, approximately 100 HS4 tariff lines are covered. This means that both EU companies (which grow raw materials, produce downstream products, market, import or export them) and companies outside the EU that are part of their supply chains for these tariff lines will be subject to compliance.

The key concept behind this regulation is that of a due diligence system, i.e. a framework of procedures and measures to ensure that products traded or exported comply with two conditions: i) that they originate from raw materials grown on plots of land that have not been deforested or degraded after 30 December 2020, and ii) that the raw materials and derived products covered by the regulation have been produced in accordance with the relevant legislation of the country of production. This due diligence system should be based on a risk-based approach, be subject to periodic review and companies should publicly report on it annually. It may be based on a collective monitoring system provided for by national legislation, or on voluntary monitoring or certification schemes, provided that their requirements are equivalent to those of the Regulation (e.g., FLEGT). The EU-authorized “Monitoring organisations” created by the Timber Regulation will however cease to exist. Under this new Deforestation Regulation, EU Member State authorities will be responsible for overseeing due diligence systems.

Three key instruments will underpin the enforcement of this regulation:

• Economic operators’ compliance with their due diligence obligations must be reflected in a “Due Diligence Statement” that they will issue for each commercial transaction (except to the final consumer), which provides traceability of products sold throughout their supply chain back to the plot of land on which their raw material was grown or produced, with precise geo-location.

• An IT system set up by the European Commission (EC) in which all due diligence statements issued must be registered, with unique identification numbers and key information parameters. This system will also become the communication interface between economic operators and Member States’ supervisory authorities and will be linked to the EU’s Single Window environment for customs to ensure smooth coordination with EU customs authorities.

• There will be a mechanism for the submission of complaints, ‘substantiated concerns’, by natural or legal persons, managed by the competent authority of each Member State, which will have to assess them, and which may lead to specific investigations.

The EU has also planned certain facilitating elements: lighter obligations for SMEs, entry into force six months later for them, and the publication of a benchmarking risk system covering all countries (or parts of countries) by the end of June 2025. The public high/standard/low risk ratings per territory will help companies to better calibrate and target their own risk assessment efforts, prevention and mitigation measures along their supply chain.

The specific penalty regime for non-compliance will be published by each EU Member State, although the EU Regulation already provides a common basis: confiscation of products and/or revenues, temporary exclusion (up to 1 year) from tenders/access to public funds or subsidies, temporary ban on trading in such products, and fines of up to 4% of the company’s annual turnover across the EU (not just in an isolated Member State).

The Regulation also informs that the possibility of extending the scope of the Regulation in different ways will be assessed and decided in several steps by 2028: inclusion of ecosystem types other than forests (other wooded areas, grasslands, peatlands and wetlands), new products (e.g. maize, biofuels) or measures targeting the financial sector to avoid capital flows that finance deforestation.

For many companies, compliance with this new regulation will require a significant effort to implement methods of working with supply chain partners to identify situations of non-compliance and/or risk, and to take proportionate and sufficient action to remedy or mitigate them.

In the short term, the most pressing challenge for companies is to manage their supply chains more closely and effectively: it will be essential to sensitise existing business partners to the new requirements and to put in place documented systems that will provide the traceability required by the Deforestation Regulation, allow verification of whether suppliers are operating on at-risk land (deforested after 30 December 2020 or harvested at risk of illegality) and provide the baseline for a due diligence system.

In the medium term, we recommend focusing efforts on two complementary levels: tactical and strategic.

• From a tactical point of view, it is worth assessing the possibilities of compartmentalising risk by adapting industrial production processes to minimise the aggregation and mixing of supplies with different geographical traceability. Mixing geo-located inputs in the production of large batches of products will increase commercial risk.
• From a strategic perspective, managing a due diligence system brings both obligations (disciplined application of procedures, periodic review, etc.) and opportunities. The additional transparency to be attained can also be a significant opportunity to consolidate more durable partnerships and alliances and to contribute more tangibly to the sustainable development of suppliers. The obligation to publicly report on the due diligence system (which can be combined with other required reports, e.g. CSRD or CSDDD) provides an opportunity to communicate the company’s performance at a narrative level and with measurable indicators, thus better positioning the company in the eyes of customers and investors. With a medium- and long-term strategic vision, companies can create a virtuous circle in terms of access to sustainable financing at preferential conditions, access to carbon credit markets, etc.

Equinoccio has extensive experience of working with the private sector outside the European Union, raising awareness of European market access requirements, helping to implement new management methods for regulatory compliance and strengthening business collaboration. This enables us to provide pragmatic advice, thanks to teams that combine multicultural skills with commercial practicality and technical rigour.