Deforestation Regulation replaces Timber Regulation

Regulation (EU) 2023/1115 („Deforestation Regulation”), which was announced last year, now regulates the placing and making available on the Union market as well as the export of certain products that are responsible for these developments. It applies to both domestically manufactured and imported products. The raw materials and products from the cattle, cocoa, coffee, oil palm, soy, wood and rubber sectors, which are further qualified by CN numbers in an annex to the regulation, are considered to be particularly deforestation-intensive, with soy being one of the main drivers precisely because of its use as animal feed. For example, the following are covered by the regulation: live cattle, chocolate, coffee, palm oil, soy flour, plywood and natural rubber.

The regulation aims to minimize global deforestation and forest degradation, preserve biodiversity and reduce greenhouse gas emissions. It also contains references to the protection of indigenous peoples. According to Art. 3 of the Deforestation Regulation, the relevant commodities and products may only be placed or made available on the market or exported if they:

• are deforestation-free,
• have been produced in accordance with the relevant legislation of the country of production, and 
• if they are covered by a due diligence statement.

When is a product deforestation-free?
According to the Regulation’s legal definition, a product is deforestation-free if it contains, has been fed with or has been made using, relevant commodities that were produced on land that has not been subject to deforestation after December 31, 2020, and, if wood has been harvested from the forest, without inducing forest degradation after December 31, 2020. Whether or not a forest degradation or deforestation has occurred can be evaluated by comparing satellite images. This requires geolocation of the land on which commodities and products were produced.

Which legal regulations of the country of production must be observed?
The country of production’s relevant legal regulations to be observed include, in addition to regulations relating to environmental protection, also regulations on labor rights, human rights protected under international law, as well as tax and anti-corruption regulations. 

What does the due diligence statement contain?
Such statement confirms that the due diligence described below has been exercised, and that no or only a negligible risk of products violating the above-mentioned requirements was found. Furthermore, by submitting such statement, the issuing party assumes responsibility for the compliance of the relevant product with Art. 3 of the Deforestation Regulation. 

Who is subject to the Regulation?
The following persons are subject to the regulation, regardless of their size:

• operators, i.e., any natural or legal person who, in the course of a commercial activity, places relevant products on the market or exports them,
• and traders, i.e., 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.
• SME traders and SME operators are subject to special obligations.

What kind of due diligence must be exercised?
Like the German Supply Chain Due Diligence Act, the Deforestation Regulation also stipulates due diligence. Accordingly, companies must implement general due diligence regulations, collect and subsequently evaluate data on the relevant products. As part of the corresponding risk assessment, companies must determine whether there is a risk that the specified products were not produced in accordance with the Regulation. The products may only be traded in accordance with the scope of the regulation if the assessment shows that there is no or only a negligible risk of non-compliance. If it is not possible to identify and separate compliant and non-compliant products, an entire consignment is deemed to be non-compliant with the Regulation.

If a non-negligible risk should be identified, such risk must be minimized, e.g., by performing audits. In addition to that, there are documentation and reporting obligations. Unlike other CSR legislation, the Regulation does not provide for a complaints procedure. However, it is standardized that third parties can report to the competent authority (in Germany the Federal Agency for Agriculture and Food) that companies are not complying with due diligence obligations.

Companies are subject to simplified due diligence if they, after an evaluation

• of the supply chain’s complexity,
• of the risk of the Regulation being circumvented,
• of the risk of mixing products of unknown origin or origin from countries with high and normal risk with products from countries with negligible risk,

have verified that all commodities and relevant products have been produced in countries or parts of countries identified as low risk under the Regulation. The general assessment of whether countries or parts of countries are at low, normal or high risk of producing raw materials in a non-deforestation-free manner is based on an objective and transparent assessment by the Commission. However, the extensive due diligence obligations can be “revived” if those responsible find out themselves or through third parties that there is a risk of products violating the Deforestation Regulation.

What are the consequences of violations?
Violations of the Deforestation Regulation can result in severe fines of up to four percent of total EU-wide turnover. In addition, the competent authorities can also enforce the immediate recall of products or their donation or disposal. In accordance with the “naming and shaming” principle, infringements of the regulation by legal entities are also published on the Commission’s website. Inspections necessary for the enforcement of the Regulation are conducted annually.
The Regulation replaces the European Timber Regulation, which has been sharply criticized, and joins an abundance of EU sustainability legislation. It increases the documentation effort and liability risks for companies. They should therefore start analyzing their supply chains at an early stage. As the regulation must be implemented by December 30, 2024, or by June 30, 2025 for SMEs, companies should use existing structures in relation to other CSR obligations, such as the Supply Chain Due Diligence Act, in order to implement due diligence. Audits will therefore become increasingly important.