EU Deforestation Policy Could Lead to 'Onerous' Compliance Requirements, Firms Say
A European Union proposal to restrict imports of goods that contribute to deforestation could place broad and “onerous” due diligence requirements on EU importers and their foreign suppliers, law firms said. Although the rules aren’t yet final and may be loosened, they will inevitably increase enforcement risks for companies that trade a range of products, the firms said, including soy, beef, palm oil, wood, cocoa and coffee.
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The new requirements are “broad and detailed,” Steptoe & Johnson said Dec. 1, “and are likely to be cumbersome and increase costs.” They will be “particularly onerous for companies” that have “minimal visibility into the lower tiers of their supply chains, Covington & Burling said Dec. 2.
The rules, proposed by the European Commission last month, would set mandatory due diligence steps for certain European operators and traders, which would be required to collect new information on where their imports are produced and meet a range of other compliance requirements (see 2111180046).
Companies would have to trace the origin of their goods, conduct a risk assessment on those goods to determine whether they comply with the EU's deforestation policies and take other steps to “ensure that there is no risk or only negligible risk” that the goods contributed to global deforestation, Covington said. The risk assessments would have to be documented and reviewed at least annually, Steptoe said.
The rules, coupled with a similar law passed by the United Kingdom in November, which will restrict imports of certain “forest risk” commodities, could force companies operating in the region to overhaul their compliance programs, the firm said. “Corporate entities that are covered by either or both of the deforestation due diligence laws may need to make significant enhancements to environmental/ human rights compliance programs,” Covington said.
The EU’s proposed rule didn’t list rubber products despite “significant pressure” to do so from the European Parliament and nongovernmental organizations, Steptoe said. It also only covers forests and not other ecosystems, such as grassland and wetlands. But the commission could add rubber and “further commodities or other ecosystems” to the restrictions within two years after the rules take effect, the firm said.
The commission could also add investment restrictions to the rules, Steptoe added, stressing that the final set of rules may not be the same as the proposed versions. “Intense lobbying can be expected from various parties, including from NGOs, businesses, and the EU’s trading partners,” Steptoe said. “[M]eaning that in the not so distant future, the scope of the proposed regulation could expand significantly.”
Regardless of how the final rules turn out, they will likely have “wide implications on EU operators” and their third-country suppliers, the firm said. Not only will the restrictions increase compliance costs on some EU companies, but it will also raise costs for their suppliers, Steptoe said, which will have to provide their EU customers a host of new commodity tracing information and documentation.
“Several suppliers, even those in compliance with the requirements of the proposed regulation, could lose business because of customers switching to suppliers that have lower compliance costs,” the firm said.
Although the EU’s timeline for adopting the rules is “difficult to predict” and will depend on lobbying from NGOs and other governments, Covington said the commission expects to implement them by 2023. “There is no doubt that the proposed regulation will be adopted in some form,” Steptoe said. “The only unknown is whether its scope and requirements will be expanded or watered down.”