New EU Regulation on Deforestation-Free Supply Chains Adopted

The recently passed European Union (EU) regulation on deforestation-free supply chains, known as the EU Deforestation-Free Regulation (EUDR), marks a significant step in global efforts to curb the devastating impacts of deforestation. Adopted by the European Parliament and the Council, this regulation establishes strict due diligence requirements for companies that place certain raw materials and products made from them on the European market or export them. ¹

Over the past three decades, an area larger than the entire European Union has been deforested, highlighting the urgency of the issue. ²  Moreover, agriculture and forestry activities are responsible for 23% of anthropogenic greenhouse gas emissions between 2007 and 2016. ³ Considering these facts, the EU Regulation on a Deforestation-Free Supply Chain (EUDR) was adopted.

The EUDR serves as a fundamental element of the EU Green Deal and an integral component of a comprehensive strategy for forest protection. Its overarching goal is to mitigate the devastating impact of deforestation and forest damage, thereby reducing greenhouse gas emissions and preserving biodiversity. Specifically, the EUDR focuses on restricting the expansion of agricultural lands used for critical raw materials such as wood, cattle, soy, palm oil, cocoa and coffee. The list of affected materials is regularly updated to account for changing deforestation patterns.

In addition, companies are subject to reporting requirements. Compliance policies must be reviewed and updated annually. Companies that are not classified as SMEs must publicly disclose their due diligence, incl. risk assessments and implemented measures. Relevant records must be retained for five years and made available to the authorities upon request.

Despite the regulation's enforcement in early 2025, companies must retroactively provide evidence of the deforestation-free status of their raw materials back to December 31, 2020. The EUDR also defines the role of member states in enforcement, supported by an online system for information exchange and inspections.

The regulation outlines clear sanctions for violations, including profit confiscation and fines of up to 4% of annual turnover. These sanctions apply to companies across the entire supply chain, encompassing affected raw materials, products, and generated revenues. Additionally, violations can result in temporary exclusion from public procurement processes.

The new regulations present various challenges for businesses:

• The procurement of raw materials could become more complex and costly due to the increased demands on suppliers.
• Similarly, the cost structure and margins of end products could become more opaque due to increased SKU complexity.
• There is a need to develop adaptive plans and due diligence procedures to identify environmentally impactful products and raw materials and adapt to regular regulatory changes.
• Reviewing the supplier base and revising the supplier code of conduct are essential to adapt company policies to the impact of the new regulation. Identifying key technologies such as satellite imagery and selecting appropriate partners are fundamental to fact-based traceability.
• Supplier audits are gaining importance, including the use of satellite imagery to provide evidence for multiple suppliers or dispersed production sites.

KPMG's teams specializing in Sustainability, Procurement & Supply Chain, and Risk & Regulation are here to help you tackle the challenges posed by the EUDR. Our experts assist in understanding potential impacts and preparing for compliance. Together, we create tailored strategies and roadmaps to take targeted actions, identify partners, and leverage technologies to enhance transparency and traceability of your corporate assets.