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Mastering EU Deforestation Regulation for Sustainable Trade

Mastering EU Deforestation Regulation for Sustainable Trade

Over the past decade, governments around the world have committed to halting deforestation and restoring forest land. Yet, despite these commitments, 2023 data shows that the equivalent of 10 football fields of tropical primary forest is lost every single minute. With time running out until 2030, the year by which 145 countries have committed to reverse forest loss, governments around the globe need to take a more proactive approach.

The European Union’s regulation on deforestation-free products (EUDR) aims to promote the consumption of “deforestation-free” products, reducing the usage of products that contribute to deforestation in the EU. 

As a product-based legislation, the EUDR will restrict companies from placing products that fall under the EUDR on the EU market. From the 30th of December 2024 (or the 30th of June 2025 for micro or small businesses), the EUDR will come into force.

This regulation is part of the EU’s broader commitment to environmental sustainability and climate change mitigation. Like other regulations, like the CSDDD and the CSRD, the EUDR has implications for global supply chains and supply chain sustainability. 

EUDR Implementation Timeline

While the EUDR will come into force on the 30th of December 2024, not all companies within the EU will be restricted from placing products that fall under this legislation on the market. The exact date from which your company will have to comply with the EUDR will depend on several factors.

To determine by which date your company must comply, you must first determine whether you are an SME (small and medium-sized enterprise). A business that exceeds two or more of the following thresholds by the 20th of December 2024 classifies as an SME:

  • Has 50 employees
  • Has over 10m in turnover
  • Has a 5m balance sheet

It’s important to note that these thresholds are calculated on an individual company basis, without a focus on root companies. This is because the EUDR itself pertains to individual companies.

From the 30th of December 2024, large businesses will be unable to place products that fall under the EUDR on the EU market unless they are:

  • Deforestation-free
  • Produced in accordance with relevant legislation of the country of production
  • Covered and documented by a due diligence statement that indicates there is no more than a negligible risk of non-compliance

For SMEs, the same regulation will apply, but it will only come into force on June 30, 2025.

It’s important to understand that “deforestation-free” in the EUDR means that products that contain, are derived from, or produced using relevant commodities sourced from land that has not been converted from forest to agricultural use, whether by human activity or natural processes, after December 31, 2020.

EUDR Timeline

EUDR Scope and Prohibition

Product Scope and Prohibition

The EUDR is a product-based legislation, prohibiting companies from placing certain commodities or derived products on the market without compliance. 

Annex 1 of the EUDR details seven commodities (cattle, cocoa, coffee, palm oil, rubber, soy, and wood), and many derived products from these commodities (such as leather, coffee, chocolate, etc.) in the scope of its legislation. Businesses need to carefully read through Annex 1 and review the product’s classification under the Combined Nomenclature. 

Commenting on the differences between the EUDR and other legislation, Sebastian Rünz, Salary Partner at TaylorWessing, states: “How the EUDR works is a little bit different from what we are used to with the CSDDD and the German Supply Chain Due Diligence act as the EUDR is product-based.”

EUDR Product Scope and Prohibition

Scope Determination Process: Products

In Annex 1, businesses will find the Harmonised System (HS) codes for commodities and derived products. Each product has an individual HS code. Businesses can find the products they intend to put on the EU market in the Combined Nomenclature and their HS codes in Annex 1 and then compare the two documents to understand if they fall within the scope of the EUDR.

For many heavily processed products that are far from their original material source, it is best to check the combined Nomenclature for specific exclusions and regulations. For example, according to Annex 1, wood is within the scope, but wooden packaging is not.

EUDR Scope Determination Process: Products

It’s important to note that the EUDR only applies to goods produced on or after June 29, 2023. 

Regulatory Obligations for Operators

From December 30th, 2024, a company that wants to place products that fall under the scope of the EUDR must first submit a due diligence statement to their respective national authority. This document affirms that the company will take accountability for the product and ensure that it adheres to the EUDR.

To ensure that a product has not contributed to deforestation or forest degradation after the 31st of December 2020, a business must be certain of its origins. Collecting information from suppliers, such as the plot location and supplier due diligence statements, will provide an operator with the information needed to create comprehensive due diligence statements.

When placing a product on the EU market, companies must communicate the reference number of due diligence statements along with all necessary information to show that due diligence was conducted and that only a minimal risk was identified. 

Non-EU companies may receive more requests from clients to provide necessary information to fulfil their due diligence obligations under the EUDR.

Key Takeaways:

  1. The EUDR focuses on product-based compliance, requiring due diligence for relevant products as listed in the EUDR Annex 1.
  1. Businesses can determine whether their products fall under the EUDR by comparing information in Annex 1 and Combined Nomenclature HS codes.
  1. Operators must gather origin information, assess risks, and submit due diligence statements in order to place products on the EU market.

Obligations Under the EUDR

Businesses must understand two definitions, which will help to clear up many doubts as to their legal obligations within the EUDR:

  • Operators: An operator is any natural or legal person who, in the course of a commercial activity, places relevant products on the market or exports them. 
  • Traders: Any person in the supply chain other than the operator who makes relevant products available on the market.

Obligations to comply under the EUDR depend on both whether they are a trader or operator and the size of their company.

Specific Obligation Scenarios

Below are specific obligations for different classification groups.

General Obligations for Operators and Traders: 

  1. Gather Supply Chain Information – Operators and traders must maintain full visibility over their supply chain, including where products originate from, and the processes involved in bringing a product to market.
  1. Assess Potential Risks – Operators and traders must identify potential deforestation risks in their supply chain and work with suppliers to minimise that risk.
  1. Submit a Due Diligence Statement – Before placing products on the EU market, businesses will have to submit a due diligence statement to demonstrate compliance with the EUDR.

Obligations Specific to Traders: 

  1. Collect Supplier and Customer Names – Create a transparent supply chain by collecting supplier and customer information, to forge a trail of information to ensure future accountability.
  1. Keep Records of Received Due Diligence Statements – Keep records of due diligence statements that can verify compliance if a body of authority requests evidence.
  1. No Need for Own Due Diligence Statement – Traders, unlike operators, do not have to submit a due diligence statement.

Non-SME Operators and Traders: 

  1. Evaluate if Previous Due Diligence Complies – Non-SME operators and traders must determine whether due diligence conducted for their products meets current EUDR regulations. All due diligence should be up-to-date and in-line with the EUDR.
  1. Rely on Valid Previous Due Diligence – If due diligence statements are valid, then operators will not have to resubmit these documents.
  1. Document Reference Numbers – Operators and Traders should document the reference number of due diligence statements to ensure that they can provide them if required by authorities.

Businesses must also establish a due diligence system, report on the due diligence system, and keep records for 5 years. 

EUDR Sanctions and Penalties

The most extensive punishment for non-compliance with the EUDR requirements is the complete inability to sell a product on the EU market. Without passing through the due diligence process and demonstrating compliance with the EUDR, a company is blacklisted in the EU market.

Other penalties for non-compliance with the EUDR are as follows:

  • Fines – Companies may experience increasing fines of up to 4% of the EU turnover from the previous year.
  • Confiscation – Any products in violation of the EUDR may be confiscated from the company.
  • Exclusion – Temporary exclusion from public procurement on the market or exporting from the EU.
  • Suspension – Trading suspensions within the EU or even a ban from using simplified due diligence procedures.

The EU Commission will also publish the name of the legal person receiving penalties, including the date of their final judgement, a summary of the activities that they have configured on the EUDR, and the nature and amount of the penalty imposed.

This final point will create major reputation damages for companies that do not comply with the EUDR. The EUDR is much more stringent than other similar regulations, like the CSR

Ensuring EUDR Compliance With Prewave

Prewave offers a streamlined solution to confirm the absence of deforestation activities in supplier areas and help your business effectively ensure EUDR compliance.

Clients can submit the location of suppliers, with Prewave leveraging satellite imaging technology to confirm the absence of deforestation. Prewave also generates a detailed risk score for each of your suppliers, detailing potential compliance issues. The speed and accuracy of Prewave’s risk management and compliance system are indispensable for regulatory compliance and sustainable sourcing.

Step-by-step Implementation Guide

To ensure EUDR compliance, a business can follow this step-by-step implementation guide. These six steps will cover a company across the entire implementation framework with Prewave.

1 – Product Origin Determination

Prewave first determines the origin of your product through a request sent directly to your supplier. We request information about the origin country, upstream producer of the commodity, and geolocation. The supplier can also include a due diligence statement, accelerating the process.

With all the initial information, Prewave then moves to categorise supplier risk. 

2 – Country Risk Assessment

Prewave begins risk assessment by classifying a supplier based on country risk benchmarking. Suppliers from low-risk countries have a reduced risk assessment profile, while high-risk countries necessitate additional steps.

Large parts of the EU will likely fall under the low-risk category. It is still unclear which countries will fall under the high-risk classification.

3 – Origin Verification

Prewave will verify the product origin details that your suppliers provided by checking satellite data against the definition of deforestation under the EUDR. We combine satellite data providers (both public and private) to ensure the accuracy of our data for our clients.

After determining that a product is deforestation-free, we move on to checking for compliance with relevant local legislation.

4 – Local Legislation Compliance

Each nation will have different land use, environmental protection, labour rights, forest management requirements, and other applicable laws to which the EUDR mandates adherence. Based on the country of origin, businesses will have to contend with this different scope of obligations.

Prewave uses a risk-based approach, combining country, industry, and commodity information with media data to provide transparency into potential risks incurred by working with products from certain countries of origin. If a company determines a high level of risk, it can use follow-up questionnaires to gain further insight.

5 – Risk Mitigation

After conducting risk assessments, businesses should strive to work with their suppliers to apply mitigation measures and decrease overall risk. This stipulation is detailed in Article 11 of the EUDR, requiring that companies mitigate known risks. 

Action planning modules like audits, training, and self-assessments will further help to identify and reduce risk in the supply chain. Prewave offers action planning that helps companies plan effective mitigation strategies for each potential risk that may arise. 

6 – Due Diligence Reporting

The EU Information System, where due diligence statements are filed and requested, is still in its development phase. Businesses must prepare for uncertainties in this system by generating and submitting comprehensive due diligence reports. By generating and updating due diligence statements through the Prewave platform, businesses will ensure that they follow all obligations and meet the expected criteria.

Prewave’s platform has proven successful with other report-based legislation, helping companies generate automated reports that align with EUDR specifications.

End to end EUDR Solution Approach

Final Thoughts

The EUDR will aim to reduce the EU’s impact on deforestation and help countries around the world get back on track to meet deforestation goals by 2030. By directly addressing environmental concerns with this regulation, the EU will continue its range of recent compliance frameworks that help improve environmental, social, and governmental initiatives in the EU area.

Prewave offers a streamlined and effective compliance solution, with advanced risk assessment tools, due diligence reporting, and AI-powered risk assessment and mitigation. 

Businesses using Prewave continue to champion global forest and biodiversity preservation, enhancing their reputation as responsible environmental stewards. 

For further insight into the EUDR, take a look at the Prewave Mastering the EU Deforestation Regulation webinar.

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