Mandatory due diligence: the Council of the European Union and the European Parliament agree to combat deforestation

Other Author       Oliver Williams, Trainee Solicitor

On 6 December 2022, the Council of the European Union (the "Council") and the European Parliament (the "EP") reached a provisional agreement on a proposal to minimise the risk of deforestation and forest degradation with products that are imported into, or exported from, the EU (the "Agreed Position"). The Agreed Position proposes mandatory due diligence obligations for operators and traders that want to place in-scope products on the EU market or export them. It builds on the European Commission's (the "Commission") proposal to prohibit certain commodities and products associated with deforestation and forest degradation from the EU market (for further information on the proposal, read our earlier legal update here).

Background to the Agreed Position

Deforestation and forest degradation are important drivers of climate change and biodiversity loss, which are two of the most substantial socio-environmental and economic issues facing contemporary society. The Intergovernmental Panel on Climate Change ("IPCC"), for example, in its 2020 Climate Change and Land Report estimated that 23% of total anthropogenic greenhouse gas emissions between 2007 and 2016 were derived from agriculture, forestry and other anthropogenic land use. In this report, the IPCC stated with "very high confidence" that these emissions were mainly a result of deforestation and other land use activities, such as the cultivation of soils. Against this backdrop, the EU has made it a strategic priority to reduce its impact on global deforestation and forest degradation by making sure products and related supply chains in the EU market are 'deforestation-free'.

The prohibition

The Agreed Position proposes a prohibition on the import to, and export from, the EU market of any of the below in-scope products that have been produced on land that has been subject to deforestation or forest degradation after 31 December 2020.

Scope

The Agreed Position proposes that when the regulation enters into force, it should apply to all operators and traders who place in, make available to or export from the EU market the following goods: (1) palm oil; (2) cattle; (3) timber; (4) coffee; (5) cocoa; (6) rubber; (7) soy; and/or (8) derived products (such as beef, furniture and chocolate).

Obligations

The Agreed Position proposes mandatory due diligence obligations for operators and traders that want to place in-scope products on the EU market or export them. These due diligence obligations will require operators and traders to:

1. prove that in-scope products are both deforestation-free, i.e. produced on land that was not subject to deforestation after 31 December 2020, and legal, i.e. compliant with all relevant applicable laws in force in the country of production, including laws preventing the use of forced labour (for further information on the US's forced labour prevention regime, for example, please read our legal update here); and
2. collect geographical information on the land where the products that they source were produced.

Practically, this will require operators and traders to make a "due diligence" statement that goods traded on the EU market have not led to deforestation and/or forest degradation anywhere in the world after 31 December 2020. These due diligence obligations were foreshadowed by the obligations under the EU's recently adopted Corporate Sustainability Reporting Directive and proposed Corporate Sustainability and Due Diligence Directive (for further information on the obligations under these directives, please read our earlier blog posts here and here).

The Agreed Position will also have implications for operators and traders established outside of the EU, since impacted EU operators and traders will need to collect information from their non-EU suppliers to be able to produce their due diligence statements. Specifically, EU operators and traders will need to be able to state that their in-scope products entering the EU market are not associated with deforestation and/or forest degradation, and have also been produced in accordance with the relevant legislation of the country of production.

In addition, the Commission will run a benchmarking system that will assess countries (or parts thereof) and their level of risk of deforestation and forest degradation. The Commission will do so by classifying countries as high, standard or low risk, and will then conduct checks on operators and traders in accordance with the country's risk. For high risk countries, member states would have to check 9% of total volumes of in-scope products traded on the EU market, whilst for standard and low risk countries, member states would have to check 3% and 1%, respectively. This effectively means that there will be enhanced monitoring for high risk countries, and simplified due diligence for low risk countries.

Penalties

The Agreed Position maintains the Commission's proposed provisions regarding penalties, in that it provides that:

1. fines should be proportionate to the environmental damage associated with the in-scope products;
2. fines can amount to up to 4% of the operators' annual turnover in the EU; and
3. penalties should include a temporary exclusion from public procurement processes and access to public funding.

Next steps

In accordance with the ordinary EU legislative procedure, the EP and the Council will now have to formally approve the Agreed Position before the regulation can enter into force, which is expected to occur in 2023. Once the regulation is in force, operators and traders will have 18 months to implement the new rules.