New EU Regulation to combat deforestation entered into force

The Regulation (EU) 2023/1115 on making available on the Union market and the export from the Union of certain commodities and products associated with deforestation and forest degradation entered into force on June 29^th, and companies have to prepare for ensuring compliance, as new due diligence requirements will become applicable as soon as on 30 December 2024.

As the EU aims at minimizing its contribution to deforestation, forest degradation, greenhouse gas emissions and global biodiversity loss, it identified six relevant commodities (cattle, cocoa, coffee, oil palm, soya, and wood) that – due to their overexploitation – contribute significantly to these problems, and introduced new requirements for placing, making available on the market or exporting these commodities, and other specified products (the so called “relevant products”) that contain, have been fed with, or have been made using these commodities. The relevant products are listed in Annex I of the Regulation, which includes, for example, meat of cattle, chocolate or wooden frames of paintings and mirrors.

Therefore, in order to place or make available on the market, as well as to export these commodities or specified products, three key requirements shall be met. They must be:

1. Deforestation-free: this shall be understood as either the commodity or its components not being subject to deforestation after December 31^st 2020, or in the case of wood, it has been harvested from the forest without inducing forest degradation after December 31^st 2020 as well.
2. Produced in accordance with the relevant legislation of the country of production in terms of i.e. land use rights, environmental protection, forest-related rules, labor rights, human rights or tax, anti-corruption, trade and customs regulations.
3. Covered by a due diligence statement, as explained below in this article.

The parties subject to the Regulation are the "operators" (any natural or legal person who, in the course of a commercial activity, places relevant products on the market or exports them), and the "traders" (any person in the supply chain other than the operator who, in the course of a commercial activity, makes relevant products available on the market and Member States). If an operator is established in a third country but intends to place these products on the EU market, it still needs to comply with these requirements. The regulation sets out different requirements for SME and non-SME operators and traders.

When it comes to operators that are not SMEs, they can only place relevant products on the market if they are compliant with the Regulation. In order to ensure this, they must, prior to placing relevant products on the market, conduct due diligence, which consists of:

1. Collection of information, data, and documents such as conclusive and verifiable information that the products are deforestation-free as well as being produced in accordance with the relevant legislation of the country of production.
2. Risk assessment based on the information to determine whether placing the product on the market complies with the regulation, by taking into criteria such as the presence of forests in the country and the prevalence of deforestation, and concerns in relation to corruption, lack of law enforcement or violation of human rights.
3. Risk mitigation measures shall be implemented to ensure an effective management of the non-compliance risks, for example by carrying out independent audits, or supporting compliance through capacity building and investment.

The operators must also have policies, controls and procedures in place in relation to the due diligence procedure, and non-SME operators must also publicly report on their due diligence system, including on the gathered information and the conclusions of the risk assessment once a year.

Traders that are not SMEs are subject to the same obligations as non-SME operators, including the obligation to exercise due diligence and publicly report once a year on their due diligence system.

Member states must designate authorities responsible for fulfilling the obligations set out in the Regulation by December 2023. The tasks entrusted to the competent authorities will include carrying out regular checks on the operators and traders and identifying situations in which relevant products that present high-risk of non-compliance are moving across the supply chain and require suspending the placing or making available on the market or the export of this kind of products as an immediate action.

In case of non-compliance, heavy sanctions are provided by the Regulation, starting with the imposition of fines proportionate to the environmental damage and the value of the products, up to at least 4% of the operator’s or trader’s annual revenue, and continuing with confiscation of the products concerned or the revenues gained, and temporary prohibition from public procurement processes, as well as from placing or making available on the market or exporting these products.

The Regulation entered into force on the 29^th of June 2023, however, the major obligations mentioned in this article, such as traders and operators' obligations and due diligence conduction generally will become applicable from 30 December 2024.

However, it is highly advisable to start a compliance strategy to avoid negative enforcement impacts once the Regulation becomes fully applicable. Our experts provide comprehensive legal support in relation to establishing the required due diligence system, drafting and reviewing the policies, controls and procedures associated with it, as well as with preparation for the reporting requirements.