Here's what companies need to prepare for and understand as the implementation date approaches
The European Union has introduced a groundbreaking regulation aimed at reducing the environmental impact of deforestation and forest degradation linked to products entering the EU market. Set to become effective from December 2025, the regulation mandates that businesses involved in the trade of specific commodities must demonstrate compliance with strict due diligence requirements.
Defining “Deforestation-Free” Products
For a product to be considered compliant under the new regulation, it must be “deforestation-free.” This means the commodities it contains must not have been produced on land that was converted from forests into agricultural use after December 31, 2020. The regulation goes further to include forest degradation, meaning the conversion of primary forests into less biodiverse land uses, such as plantations, must also be avoided.
Unlike previous legislation focusing on illegal logging, this regulation extends to deforestation that may have been legally sanctioned in the country of origin, with the goal of curbing even legal practices that contribute to environmental damage.
What Does Compliance Require?
From December 2025, businesses will be required to submit a detailed due diligence declaration before placing any affected product on the EU market. This will include a statement that confirms the goods are free from links to deforestation and forest degradation. Furthermore, businesses must demonstrate that the goods were produced in line with relevant environmental, social, and legal regulations in the country of origin, which can range from labor laws to forest management and indigenous land rights.
The new law will be enforced through audits and checks by national authorities across EU member states, and the risk of non-compliance will be monitored regularly.
Penalties for Non-Compliance
For companies failing to meet the requirements, significant penalties will apply. Fines could reach up to 4% of the company’s turnover within the EU market. Repeat offenses may result in further penalties, including confiscation of goods, exclusion from public procurement opportunities, and temporary bans on trading certain products in the EU market.
Impact on the Supply Chain
Supply chains will be heavily scrutinized under the new regulation. Companies must provide detailed information about the entire journey of a product—from its origin to final sale. Businesses should consider the potential long-term impact of the regulation on their supply chains, especially as it relates to risk assessments and potential changes in sourcing strategies.
What Commodities Are Affected?
The regulation applies to a wide range of commodities that have been linked to deforestation and forest degradation, including:
- Cocoa
- Cattle
- Coffee
- Oil palm
- Rubber
- Soybeans
- Wood and wood-derived products
In addition to these commodities, many processed goods derived from them, such as leather, chocolate, palm oil derivatives, coffee products, and paper, are also covered. To ensure compliance, businesses must carefully assess their products’ supply chains, as the regulation stipulates that these goods must not be associated with deforestation or forest degradation that occurred after December 31, 2020.
Key Takeaways for Businesses:
*Preparation is Key: Even though the regulation comes into effect in December 2025, companies should begin adjusting their practices now by revising supply chain audits and ensuring traceability for the products covered by the law.
*Global Trade Implications: The regulation has far-reaching implications for businesses operating globally, not just those within the EU. It will affect how products are sourced, traded, and certified.
*Due Diligence Requirements: Businesses will need to prove their products’ compliance through comprehensive due diligence processes, which may involve independent audits and working closely with suppliers.
*Enforcement and Risk of Non-Compliance: Companies should be aware of the enforcement mechanisms in place, which will include routine checks by national authorities, as well as the possibility of scrutiny from private entities.
By proactively aligning with the regulation’s requirements, businesses can mitigate risks, stay ahead of enforcement deadlines, and avoid potentially costly penalties. The regulation represents a significant shift in global trade and environmental responsibility, pushing companies toward more sustainable practices in the face of rising environmental concerns.
