Another step towards green transition: EU’s deforestation regulation

Our industry is engaged in an important dialogue to improve sustainability through ESG transparency and industry collaboration. This article is a contribution to this larger conversation and does not necessarily reflect GRESB’s position.

As global concerns about environmental sustainability and climate change escalate, regulators around the world are adopting increasingly stringent measures to address pressing issues such as deforestation. One such regulation is the European Union’s Deforestation Regulation (EUDR), which entered into force on June 29, 2023, and has significant implications for companies operating in affected industries. This regulatory evolution aligns with broader global conversations, including deliberations at the 28th Conference of the Parties (COP28), and underscores the critical link between environmental policy and business strategy.

Deforestation remains one of the most pressing environmental challenges of our time, with vast areas of forest disappearing every year due to human activities such as logging, agricultural expansion, and infrastructure development. This widespread deforestation not only contributes significantly to global greenhouse gas emissions, but also leads to loss of biodiversity, soil degradation, and disruption of water cycles. Recognizing the urgent need to address these challenges, the EU introduced the EUDR.

The EUDR, which covers commodities such as cattle, cocoa, coffee, oil palm, rubber, soy, and timber, and products derived from these commodities, aims to reduce Europe’s contribution to global deforestation and forest degradation. The main obligations of the EUDR will apply to all covered entities (except micro and small entities) from December 30, 2024, and to micro and small entities from June 30, 2025.

By targeting key commodities linked to deforestation, the EUDR aims to minimize greenhouse gas emissions, conserve biodiversity, and promote sustainable land-use practices. The objectives are not only environmental but also economic, as it encourages companies to adopt sustainable practices and innovate within a greener framework.

1. Complex Supply Chain Scrutiny: The EUDR requires a thorough review of supply chains, from the sourcing of raw materials to the delivery of finished products. Companies must trace the origin of raw materials and ensure compliance with environmental legislation, adding another layer of complexity to supply chain management.
2. Legal and Compliance Challenges: Companies must navigate complex legal landscapes, including international environmental laws and regulations in sourcing countries. Legal teams play a critical role in interpreting and implementing compliance strategies to mitigate the risks associated with non-compliance.
3. Technology Integration for Transparency: The use of technologies such as blockchain and supply chain management software is becoming essential for transparency. These tools enable real-time tracking of materials, verification of compliance, and streamlined reporting processes.
4. Due Diligence and Risk Assessment: The EUDR requires rigorous due diligence and risk assessment processes. Companies must assess the risk of non-compliance at various stages of the supply chain and take corrective action to minimize risk.
5. Financial and Reputational Risks: Failure to comply with the EUDR not only carries financial penalties, but also significant reputational risks. Consumers and stakeholders are increasingly demanding transparency and ethical practices, impacting brand image and market share.

The new regime under the EUDR, the first of its kind with stringent requirements for deforestation due diligence and traceability, poses significant challenges for companies in terms of compliance costs and operational adjustments. While financial institutions are currently excluded from its scope, future reviews may extend coverage to additional products and sectors. The extensive data collection and traceability requirements mirror the stringent requirements of other regulatory frameworks. Compliance will require significant changes to supply chain interactions to ensure compliance with the new regime, given the severe penalties for non-compliance and the enforcement challenges for competent authorities in member states.

Sharing best practices, leveraging technology to improve supply chain visibility, and fostering cross sector partnerships are essential strategies for navigating the complexities of the EUDR and related regulatory frameworks. Engaging with industry associations, participating in sustainability forums, and investing in green technologies are proactive steps that companies can take to stay ahead of a rapidly evolving regulatory landscape.

In conclusion, companies must take on adaptive strategies to navigate a dynamic regulatory environment shaped by global discussions at forums such as COP28, and regional regulations such as the EUDR, particularly in the context of tackling deforestation.

Close collaboration between legal teams and business leaders is essential to develop robust compliance frameworks, leverage innovative technologies for supply chain transparency, and embed sustainability principles into core business strategies.

These proactive measures not only ensure compliance, but also pave the way for responsible and sustainable business practices, contributing positively to global environmental conservation efforts and long-term business resilience.

This article was written by Döne Yalçın, Partner at CMS.