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Insight

New supply chain pressures on commodities

Daniel Merlo
06/12/2021

Locations

France, Germany, Italy, Netherlands, Spain, United Kingdom

Businesses producing, importing/exporting and selling palm oil, beef, soy, cocoa, coffee and wood need to be alert to the impact of the upcoming EU Deforestation Regulation on their supply chains and plan for compliance with the new regulatory regime.
 
The European Commission has proposed the EU Deforestation Regulation – currently before the European Parliament – as part of its Green Deal to prevent consumption of a wide variety of goods in the EU, from contributing to deforestation and forest degradation.

The proposed regulatory regime imposes a significant burden on businesses involved in palm oil, beef, soy, coffee, cocoa and wood, or goods that contain, have been fed with, or have been made with those products.  In order to sell these goods businesses will have to demonstrate that they were produced:
 
  • on land that has not been subject to deforestation (i.e. converted from forest to agricultural use) after December 31, 2020 (and where the good is wood, that it has not been harvested from the forest without inducing forest degradation); and
  • in accordance with the legislation of the country of origin.

In order to demonstrate this, businesses will be required to conduct mandatory due diligence and submit a due diligence statement to their national authorities confirming compliance, or that there is only a negligible risk of non-compliance. If businesses do not meet these requirements their goods risk being prevented from being sold on the EU market or suspended from sale.

The due diligence requirements include:
 
  • collecting and maintaining records of a wide variety of information on:
    • the goods themselves and the quantities
    • country of production, including geo-localisation coordinates, latitude and longitude of all plots of land where the relevant goods were produced
    • details of suppliers and customers
    • adequate and verifiable information that the products are deforestation free and produced in accordance with the laws of the country of origin 
  • conducting complex risk assessments to assess compliance with the regulatory scheme against criteria such as:
    • the assignment of risk to the country of origin
    • the presence of forests in that country and the prevalence of deforestation  or forest degradation
    • concerns in the country of production of levels of corruption, document and data falsification, lack of law enforcement, armed conflict, and existing UN and EU sanctions

EU businesses will also be required to have in place adequate and proportionate risk mitigation policies and measures, such as using satellite monitoring tools, field audits, capacity building of suppliers or isotope testing to check the origin of the product.

In the EU scheme, the principal burden falls on businesses ('operators') who first make available the relevant goods on the EU market, or export them from the EU.  However, all other businesses in the supply chain ('traders') who supply the relevant goods on the EU market for distribution, consumption or use will also face compliance requirements. 

Businesses who infringe the regulations will, at a minimum, face fines, confiscation of the goods and revenues gained from the sale of those goods, and a temporary exclusion from public procurement processes. The fines will be proportionate to the level of environmental damage and value of the goods concerned, and calculated in order to deprive businesses of the financial benefit obtained from the infringement.

Competent authorities will be created in EU Member States to carry out inspections of imports, report on their enforcing activities, and react to substantiated concerns.  To assist them they will have access to relevant information on the relevant goods, such as geographic coordinates and country of production, through a digital system, and a country benchmarking system conducted by the European Commission will determine the risk of deforestation. 
 

In the UK the framework for a similar scheme has recently been created in the Environment Act 2021, although the details remain to be clarified in regulations which are anticipated soon.

The Environment Act sets out that businesses in the UK will have to apply a similar due diligence mechanism, requiring them to identify and obtain information about the relevant commodities, asses the risk that relevant local laws were not complied with, and mitigating that risk.  They will also be required to prepare an annual report on their due diligence system.

Important differences exist between the UK and EU schemes including the goods that are covered, and the fact that the UK scheme exempts businesses from needing to comply with the obligations if their products only contain minimal amounts of the regulated goods, or their turnovers are below above a certain threshold, the levels of which will be confirmed in the forthcoming regulations.
 

Fieldfisher's London and Brussels based International Trade Teams can help EU and non-EU businesses involved in the production and sale of the goods to get ahead of the curve by providing tailored advice on the forthcoming regulatory framework, its impact on supply chains, and the steps required to ensure compliance.
 

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Areas of Expertise

Supply Chain and Logistics

Related Work Areas

Retail and Consumer