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With the EU’s deforestation laws coming online this month, CPG and Industrial companies will need to ensure that select commodities in their supply chains do not contribute to deforestation. The commodities scoped into the regulation include wood, rubber, palm oil, soy, beef, cattle, and cacao. In advancing this regulation, the EU aims to reduce its impact on climate change, greenhouse gas emissions, and biodiversity loss. Companies will have to quickly adapt their commercial operations to ensure compliance and think strategically to gain a competitive edge in doing so.
Key takeaways:
- With more regulatory pressures from the EU, starting in January 2025 palm oil will be required to undertake greater due diligence, alongst trading in cattle, coffee, palm oil, rubber, soya, and wood as part of the EU Deforestation Regulation (EUDR)
- Companies are preparing for EUDR by conducting thorough supply chain assessments, implementing robust data collection systems, performing risk assessment on their suppliers, and developing mitigation strategies
- As supply chain due diligence will need to be materially fortified, companies are looking at embedding ESG criteria consistently while also reconfiguring for compliance
- Companies are moving quickly to prepare given the January 1, 2025 start
The EU’s push for greater deforestation transparency
With the rise of criticism around false deforestation-free claims, the EU has passed rules in 2023 to guarantee that the products EU citizens consume do not contribute to deforestation or forest degradation worldwide. Additionally, the new EUDR is also expected to bring down greenhouse gas emissions and biodiversity loss. Palm oil, cattle, soy, coffee, cocoa, timber, rubber, and products derived from the listed commodities (such as beef, furniture, or chocolate) will be covered.
Starting December 30, 2024, companies doing business in the EU will need to comply with the requirements of the EU Deforestation Regulation (EUDR). This new regulation brings particularly significant implications and requires businesses dealing with certain products to conduct even more extensive due diligence on their supply chains.
The EUDR commitment was also confirmed by the European Green Deal, the EU Biodiversity Strategy for 2030 and the Farm to Fork Strategy. Furthermore, EUDR repeals the existing EU Timber Regulation.
Who EUDR applies to
The EUDR applies to all companies that sell, import, or export the relevant products, including:
- Operators: Any natural or legal person who places relevant products on the market or exports them
- Traders: Any person or entity in the supply chain other than the operator who makes relevant products available on the market
Many U.S. companies will be impacted:
The EUDR will impact U.S. and North American companies that export covered commodities to the EU, either directly or indirectly through an EU supplier. Although forest protection is an issue in North America, there are parties denying the severity of deforestation in North America.
Impacted industries:
Many companies have already set targets to become “deforestation free” and levels of preparedness vary. According to the S&P Corporate Sustainability Assessment, 34% of the largest companies in the S&P Europe 350 Index have set targets to reduce, offset, or end deforestation in their operations and/or supply chains.
Most impacted countries:
Besides companies placing EUDR-related products on the EUR market, the economies of major palm-oil producing countries in Asia, such as Indonesia and Malaysia, the agribusiness industries of countries such as Brazil and Argentina, and the EU-bound coca exports from countries such as Cote d’Ivoire and Ghana will be affected.
What it requires
The EUDR requires companies to:
- Prove that products do not originate from recently deforested land
- Produce products in accordance with applicable local laws
- Cover relevant goods with a due diligence statement
- Implement sustainable sourcing practices and traceability measures
When it takes effect
The EUDR entered into force on June 29, 2023. However, the enforcement date was extended to December 30, 2025 for most businesses and June 30, 2026 for some small and microenterprises.
Plan for secure data exchange with trading partners
Meeting EUDR requirements will benefit companies from traceability of transactions across many global supply chains from source to end point. Trading partners will have to agree on transaction details like volume, product, origin plot of land, time of harvest, and species. This will ensure all materials have been sourced in accordance with EUDR standards. They will also need to show social compliance, such as adherence to Free, Prior, and Informed Consent (FPIC).
The Forest Stewardship Council (FSC) is building a dedicated platform with blockchain technology for FCS certificate holders called FSC trace, which will help facilitate this traceability.
How it will be enforced
The EUDR will be enforced by competent authorities in the EU member states. The EUDR establishes detailed rules on the obligations of competent national authorities to conduct checks on operators and traders established in their territory to ensure EUDR compliance. Where relevant products present high risk of non-compliance, the authority may require immediate remedial action (e.g., interim measures to block products from entering the market). Where products are non-compliant, the authority will require the operator to take corrective action within a specified and reasonable timeframe.
The EUDR will also permit private parties to submit substantiated concerns to operators and authorities in instances of potential non-compliance.
What penalties will non-compliance bring
In addition to national law, the EUDR has specified a number of potential penalties for non-compliance:
- Fines proportionate to the environmental damages and value of the items
- Confiscation of the covered products or revenues gained from the items
- Temporary exclusion from public procurement processes and public funding
- For repeat offenses, temporary prohibition from dealing in the EU in those items
Actions boards can take:
- Establish internal due diligence policies in alignment with EUDR and anticipate increased reporting and disclosure requirements
- Train all board members on the emerging regulatory and industry association activities related to commodity
- Incorporate supply chain traceability risk into broader enterprise risk assessments
- Launch supplier management and education platform to identify suppliers (with limited optionality) and understand pathway to compliance
- Enhance supplier management systems and risk mitigation strategies to account for new EUDR requirements
- Require product-level compliance exposure and layer in additional operational complexity to P&L analysis
Questions for the boardroom:
- What claims are we making about deforestation-free status in our supply chain and in consumption of palm oil? How have we backed up those claims?
- Have we begun understanding our EUDR reporting requirements? If so, what are they across commodity types? If not, what’s the timeline to do so? Do we have internal capability and expertise to meet EUDR timelines and disclosure requirements?
- What supplier support measures exist to improve supply chain visibility from where we import feedstock or other products with embedded palm oil?
- How can we use AI systems to improve and simplify reporting?
- How can we best manage our third party risk on EUDR compliance?
Additional Telesto resources:
- Boards Series: Emerging embedded palm oil and deforestation policies – what board members need to know
- Board Series: Navigating corporate climate action under a second Trump administration – 7 focal points for business leaders
- Board Series: How will Apple win amidst the turbulence of China tariffs and export restrictions in Trump 2.0?
- Atlas, equips your organization’s corporate directors and leaders with the insights and knowledge necessary to stay up to date, mitigate risks, and seize business opportunities associated with sustainability, climate, and ESG.
