New EU deforestation regulations aim to tackle climate change
The new EU Deforestation Regulation (EUDR) aims to ensure key products traded and consumed in the EU and globally no longer contribute to deforestation and forest degradation.
Companies that for example place cocoa, coffee, rubber, soyabeans and oil palms on the market and especially their derivatives, such as palm oil, must adapt to ensure they comply with the Regulation. It is expected satellite monitoring tools and DNA analysis, they will check where products come from.
The Intergovernmental Panel on Climate Change (IPCC) has found that halting deforestation and restoring ecosystems is one of the most efficient ways to reduce CO2 levels and fight climate change.
In Germany, there are currently approx. 27,000 companies that import wood or wood products. In a 2018 survey, the Thünen Institute found that only 42 % of these importers were aware of the existence of the European Timber Regulation (EUTR).
The new EUDR will lead to a tightening of existing compliance systems for companies that were already covered by the EUTR, and for many other companies it will mean implementing a corresponding system for the first time. The EUDR, a more stringent successor to the EUTR, entered into force on 29 June 2023 and the new rules will become applicable from 30 Dec 2024.
The EUDR also pushes for the stricter implementation of its sanctions compared to the EUTR. The Regulation sets the maximum amount of possible fines for legal entities set at a minimum of 4 % of the annual aggregate turnover. In addition, the competent authorities are empowered to force the withdrawal of a relevant product from the market and recall it immediately. It is expected German legislation will tighten the existing sanctions when implementing the Deforestation Regulation.
Companies placing or exporting products in or from the EU market will have to conduct due diligence to confirm that the products have not been sourced from land, which was deforested or degraded, Companies will also have to verify that these products are compliant with relevant legislation of the country of production, including respect for human rights, and the rights of affected Indigenous Peoples.
The move shows that ESG issues are being turned into legally binding regulations and as a result, companies are being advised to maintain a close examination of these developments in their area of business.
The EUDR makes it imperative companies regularly check their supply chains for possible regulatory requirements, independently of their core business.
Under the EU Deforestation Regulation a wealth of information must be collected along the supply chain for their product to be imported. Among other things, the Regulation sets out:
· the exact name of the product,
· the name and contact details of all companies, operators or traders who have supplied them with the relevant products, and
· adequate, conclusive and verifiable information that the relevant products are deforestation-free.
Based on this information, operators and traders can then carry out a risk assessment to determine whether there is a risk that the relevant products may not conform as required by the Regulation.
If there is a non-negligible risk, this must be minimised as much as possible by obtaining further information or carrying out other measures The operator must provide a due diligence statement to the competent authority stating that it has complied with these due diligence requirements before placing the relevant products on the market. This way, the market participant assumes responsibility that the products conform with the Regulation.
The risk of regulatory action arising from ESG related issues is a key concern for directors. The significant risks from litigation, regulation, and activism mean boards of directors should be considering how best to oversee their company’s ESG agenda and its progress.
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