Author: Julia Hazel, PhD, Lead Computational Climate Scientist and Nicolas de Zamaroczy, PhD, Lead Computational Social Scientist
Companies can no longer ignore the urgency to reduce their deforestation impact- especially if they want to continue doing business in the European Union.
Update on Nov 14, 2024:
As of November 14, 2024 the European voted to postpone the EU Deforestation Regulation (EUDR) compliance deadline by 12 months to December 30, 2025. Companies must certify that their supply chains are free of companies linked to deforestation or risk significant fines. Similar to the EU’s General Data Protection Regulation (GDPR), this law is not limited to EU companies, but rather to any companies doing business within the EU.
The postponement gives companies a chance to get in front of the upcoming regulations. The extension does not remove the need to act swiftly but rather allows companies runway to get it right in the face of rising global legislation such as Australia’s Mandatory Climate-Related Financial Disclosures.
Unfortunately, despite numerous global treaties and corporate attestation supporting deforestation-free supply chains over the past decade, deforestation rates have not fallen.
Too often corporate disclosures are aspirational and lack the visibility required to identify potential supply chain linkages to deforested locations and commodities.
The EUDR is arguably the first major global initiative requiring corporate accountability for any connections to deforestation. With other similar regulations proposed or under review, this new regulatory risk shows no signs of retreating and will require companies to quickly gain that visibility or risk significant financial and reputational damage.
What is the EU Deforestation Regulation?
The EUDR has three main goals:
- to prevent deforestation
- to cut greenhouse gas emissions, and
- to prevent further agricultural expansion and biodiversity loss.
The EUDR regulation stipulates that any operator or trader of seven large key commodities – palm oil, cocoa, cattle, coffee, timber, soy, and rubber – as well as their derived products, must provide evidence that these commodities and products did not originate from recently deforested regions or contribute to forest degradation.
Additionally, operators and traders must certify that their products comply with all relevant laws of the source country, including labor, anti-discrimination, indigenous rights, and pollution regulations.
Failure to comply could result in:
- fines of up to 4% of a company’s revenue in an EU member state
- criminal charges, and
- reputational damage
Beyond Direct Commodities: Far-Reaching Impact Throughout the Supply Chain
The goal of the EUDR is to limit demand for products grown in recently deforested areas, thereby reducing a primary incentive for forest loss. Scientists agree that deforestation is a major cause of climate change, with tropical deforestation accounting for roughly 20% of annual Greenhouse Gas (GHG) emissions worldwide.
One of the primary reasons forests are cleared is for agricultural expansion, and the seven key products targeted by the EUDR were chosen based on scientific evidence linking their production to logging activity and illegal deforestation.
While stipulations involving sourcing these commodities directly impact the food and agriculture industries, their derived products involve a wide array of industries. For example, most lumber and natural rubber by-products will be included in the legislation, affecting everything from office furniture to rubber gaskets and from cardboard to air bags. Textiles, automobiles, finance, fuel and energy represent just a handful of the industries that would be impacted by deforestation regulations.
Moving Beyond the Say-Do Gap
The EUDR is a landmark regulation that requires action beyond corporate disclosures and zero-deforestation commitments. Zero deforestation commitments are a crucial part of corporate governance around deforestation, and 60% of corporations with the largest exposure to deforestation have set at least one policy on deforestation. However, while zero-deforestation commitments represent a good step towards addressing corporate deforestation risks, their success in mitigating large-scale deforestation has been minimal.
These commitments often lack immediate or near-term deadlines, clear implementation plans, and traceability to indirect suppliers, to name a few drawbacks. Global Canopy’s Forest 500’s most recent report, which lists and ranks the policies and performance of 350 companies and financial institutions with greatest exposure to deforestation risk, reveals that two-thirds of companies with commitments are not publishing evidence of their implementation. This underscores the fact that policies and commitments are only useful if they are implemented and achieve results.
More Than Just a “Box-Ticking Exercise”
The EUDR underscores the fact that addressing deforestation at the corporate level is complex and requires a data-driven, multi-faceted approach. As PWC reports, “EUDR Compliance is much more than a box-ticking exercise” and “regulatory scrutiny will be intense.”
One crucial component surrounds supply chain transparency and traceability. To properly perform due diligence, companies must have insight into their direct and indirect suppliers to track products back to their origin, which allows for the identification of potential risks.
Products need to be mapped to their source plot of land using precise geospatial information, such as in the form of satellite and remote sensing data, to ensure deforestation did not occur in the recent past where at-risk commodities were sourced.
The country of origin is also significant as certain countries are higher risk for producing goods sourced from deforested areas. These diverse pieces of information are necessary and provide actionable insights for corporations to mitigate deforestation risks.
Beyond the EUDR – US Deforestation Due Diligence on the Horizon
Corporate supply-chain due diligence will become commonplace as regulations such as the EUDR become the norm.
For instance, similar legislation to the EUDR is being proposed in the US with the Fostering Overseas Rule of Law and Environmentally Sound Trade (FOREST) Act, which would prohibit the import of palm oil, soya, beef, cocoa and rubber products linked to illegal deforestation.
With the December compliance deadline fast approaching, corporations must act swiftly to invest in solutions that give them insight into their supply chain to mitigate risks and remain compliant.
Interos is ahead of the game in mapping deforestation risks throughout the entire supply chain. Speak to an expert today.
