Due Diligence Requirements to Tackle Deforestation: An overview of the EU and British proposals

Introduction

Deforestation and forest degradation are at the core of two planetary crises: biodiversity loss and climate change. The Food and Agriculture Organization of the United Nations and the United Nations Environment Programme estimate that 420 million hectares of forests were lost from 1990 to 2020 through conversion to other land uses. The main driver was agricultural expansion, which was behind almost 90% of global deforestation. With more than 60% of animal species and plants found in forests, deforestation and forest degradation (further referred to as “deforestation”) are among the top drivers of worldwide biodiversity loss. Further, as the Intergovernmental Panel on Climate Change outlines, deforestation is a leading cause of greenhouse gas emissions, accounting for around 11% of total net emissions. Continued deforestation is especially unfortunate because halting it is one of the most cost-effective actions to mitigate climate change.

Deforestation and forest degradation are at the core of two planetary crises: biodiversity loss and climate change.

The problems associated with deforestation have been well known for decades, yet large-scale political actions to tackle these issues stagnated until last year. The prevalence of these challenges and the slow pace of progress led to an update of the New York Declaration on Forests in October 2021, and just a month later to more than 140 countries signing a pledge at COP 26 to halt and reverse forest loss and land degradation by 2030. Some governments suggested measures to reduce commodity-driven deforestation and forest degradation. This article examines proposals by the European Union and the United Kingdom.

The European Union

On November 17, the European Commission presented its proposal for a regulation on deforestation-free products, aiming to ensure that only “relevant commodities and products” that are deforestation free, produced in accordance with the laws of the country of production, and covered by a due diligence statement are available on or exported from the European Union’s common market.

The proposal would cover all “relevant commodities,” which are defined as cattle, cocoa, coffee, palm oil, soya, and wood, as well as all “relevant products,” meaning goods that contain, have been fed with, or have been made using “relevant commodities.” These commodities and their derivatives were chosen because they are associated with the highest share of the European Union’s embodied deforestation.

Forest is defined as land spanning at least 0.5 hectares, with trees higher than 5 metres and a canopy cover of at least 10%. Specifically excluded are agricultural plantations and land that is predominantly under agricultural or urban land use. The proposal also includes a cutoff date of December 31, 2020—meaning no goods in the scope of the regulation could enter or exit the EU if they were produced on land subject to deforestation after that date—to mitigate supply chain disruptions and adaptation challenges caused by the legislation.

The plan stems from a broader strategy toward deforestation-free value chains proposed in 2019 and which became an integral part of the EU Green Deal. After publishing various working documents, including an impact assessment, the commission conducted an open public consultation in 2020 where a large majority supported a mandatory due diligence approach. In the final proposal, the commission went for a tiered, mandatory due diligence system combined with a benchmarking system.

The proposal would require all “operators and non-SME traders” to perform due diligence for all “relevant commodities and products,” ensuring their compliance with the deforestation-free provision of this legislation and with domestic laws in the producer country. The proposal presents three steps of the due diligence process: (1) gathering all relevant information, (2) assessing the risk of non-compliance with this regulation, and (3) mitigating risks, if present, to a negligible level. To ensure further traceability, all operators must collect the geographic coordinates of all the plot(s) of land where the relevant commodities and products were produced. Lastly, all operators and non-SME traders are required to submit a due diligence statement to customs authorities through an electronic information and communication system before their placement on the EU market.

The due diligence process would be linked with a new benchmarking system, provided and maintained by the commission. The benchmarking would place countries in different “risk” categories, based on past experiences and cases of deforestation linked to the relevant commodities, as well as based on criteria related to the countries’ engagement in fighting deforestation. Based on the three risk categories (low-risk, standard, and high-risk), the due diligence obligations for operators and member states’ authorities would then vary, with simplified requirements for commodities and products coming from low-risk countries and extended requirements for those coming from high-risk countries.

Regarding enforcement, the proposal assigns the responsibility to “competent authorities” of EU member states. Competent authorities must check on (1) operators and traders for their compliance with due diligence requirements and (2) relevant commodities and products for their conformity with this legislation. Information for risk analysis and, among others, the benchmarking system, should support and guide this process. The proposal also provides a list of penalties to be established in national legal systems that includes fines, confiscation of commodities and products, confiscation of revenues, prohibition of economic activity, and exclusion from public procurement.

Consultations with EU stakeholders have taken place on the proposal, which is now in the legislative process of the European Parliament awaiting a vote and approval in plenary. Based on a released draft report, the final legislation will probably, among other minor changes, (1) include rubber and rubber-based products in its scope, (2) cover forest-mosaic ecosystems, tropical woodlands, and savannahs, (3) limit the due diligence obligations to operators or traders placing a product on the EU market for the first time, (4) include requirements for external audits of operators’ and traders’ due diligence reports, and (5) adopt a simplified benchmarking system only.

According to commission estimates, the proposed regulation would help save at least 71,920 hectares of forest and 32 million tonnes of CO2 annually. The deforestation proposal is thus an important part of EU strategies for climate change mitigation and is designed to complement other projects, such as the current legislative initiative on Sustainable Corporate Governance on human rights and environmental impacts of companies and their value chains.

The proposal only marks the start of the EU legislative process, however, and may still undergo significant changes before its adoption. Moreover, while the current French presidency of the EU Council aims to reach a common position by June 2022, the adoption of the legislation would be followed by a transition period lasting up to 2 years.

The United Kingdom

The UK Environment Act 2021 was adopted on November 9, laying down a framework to address deforestation. According to the act, a regulated person must not use a forest risk commodity or a derived product in his/her commercial activities unless there is compliance with relevant local laws.

The act states that forest risk commodities will be later specified in regulations made by the secretary of state and such regulations may specify only a commodity that has been produced from a plant, animal, or other living organism. Furthermore, it is indicated that a commodity may be included only if it is considered that forest is being or may be converted to agricultural use to produce such commodity.

Forest is defined as an area of land of more than 0.5 hectare with a tree canopy of at least 10%, excluding trees planted for the purpose of producing timber or other commodities. Interestingly, it is clarified that the regulations will not specify timber or timber products as defined by the EU Timber Regulation.

Following recommendations by the Global Resource Initiative task force, which was entrusted by British public officials to find ways to tackle deforestation, and a public stakeholder consultation conducted in 2020, the act introduces a mandatory due diligence requirement. As a consequence, a regulated person must establish and implement a due diligence system in relation to the forest commodity used in his/her commercial activities. The system must (1) identify and obtain information about the commodity, (2) assess the risk of non-compliance with relevant local laws, and (3) mitigate that risk.

The act further states that secondary regulations by the secretary of state may address the due diligence requirement, including in particular (1) the information that should be obtained, (2) the criteria to be used in assessing risk, and (3) the ways risk may be mitigated.

The act indicates that the thresholds and the determination of the amount are to be detailed by secondary regulations. The due diligence and reporting requirement on due diligence exercise are exempted if (1) the regulated person before the start of the regulating period notifies the secretary of state or other designated regulator that he/she is satisfied on reasonable grounds that the amount of the commodity used in his/her British commercial activities during the period will not exceed the threshold prescribed in secondary regulations, and provides any other prescribed information that may be required by secondary regulations; and (2) the amount of the commodity used in the person’s British commercial activities during the period does not exceed the threshold prescribed in the secondary regulations.

Enforcement is also subject to secondary regulations, with the act merely containing a framework for the secretary of state to specify the enforcement regime. The secondary regulations may include provisions on civil sanctions due to failure to comply with the act or the obstruction of or failure to assist an enforcement authority, and provisions creating criminal offences punishable with a fine due to failure to comply with civil sanctions or the obstruction of or failure to assist an enforcement authority.

The importance of effective enforcement of the due diligence regulations is highlighted in the consultation, and it is noted that enforcement authorities should have three main functions: (1) monitoring business compliance, (2) investigating compliance, and (3) imposing sanctions when a breach has been identified. The proposed maximum penalty is GBP 250,000.

The British government is now reviewing feedback from the December 3, 2021, to March 11, 2022 consultation, which aimed to gather insights from relevant stakeholders before designing secondary legislation implementing the due diligence provisions.

The UK Environment Act 2021 constitutes the basic framework of British environmental policies, and many details are yet to be addressed in secondary regulations. Consequently, we do not know how these regulations will evolve and how they would affect British efforts to combat deforestation.

Considerations on the Way Ahead

The development of legislation targeting deforestation and imposing mandatory due diligence is a new policy approach, so little is known about implementation. What should be considered on the way ahead?

Scope of the Legislation

Defining the scope of the legislation is challenging, not only in terms of determining the commodities covered, but also regarding the definition of forest or what is considered as deforestation. A narrow definition may not prevent some forms of deforestation that are legal under producer countries’ laws, while a broad one might entail problems or higher costs of monitoring and enforcement.

World Trade Organization Consistency of the Measures

Another challenge is whether and how these types of regulations can comply with World Trade Organization (WTO) rules. For example, it could be argued that there is potential discrimination because only certain commodities and certain countries or regions are covered. Although past research has demonstrated that due diligence requirements can be designed in a WTO-consistent way, certain producing countries impacted by the legislation might claim due diligence requirements to be an unnecessary obstacle to trade. Consequently, WTO members are closely following the development of deforestation legislation.

Transition Period Needed for Firms and Enforcement Authorities to Adjust and Be Able to Comply

Imposing mandatory due diligence requirements will entail a major change in how companies conduct their business and cooperate with other actors in their global value chains. It will also require substantial adaptation by enforcement authorities. A reasonable transition period may be needed to ensure sufficient time to adjust and implement the regulation. Further input from businesses and enforcement authorities may be needed to determine the length of this transition period, as well as close collaboration among all relevant actors during the transition and implementation phase.

Risk That Companies May Transfer the Obligation to the End of the Value Chain, Which Has Less Technical Capacity

One problem with due diligence requirements is that the burden of the obligation is often transferred to the end of the value chain (farmers), where there are fewer resources and less technical capacity for implementation. This means farmers, especially smallholders, frequently face a major narrowing of their oftentimes very small profit margin, even when they comply with deforestation legislation. Thus, deforestation legislation involving mandatory due diligence may need to entail incentives to share the costs equally within global value chains or benefits for involved actors with less capacity.

Spillover and Patchwork Effects With a Negative Trade Impact on Developing Countries

Some developing countries fear the so-called spillover effect, in the sense that due diligence requirements would apply even if an export is not going to a country where such legislation is in place. Further, if several deforestation laws with different definitions of deforestation and reporting requirements for due diligence are in place, the administrative burden for producers would increase significantly. As a result, mandatory due diligence legislation may need to be coupled with capacity building and assistance to developing countries to help their producers comply with the administrative burden directly or indirectly linked to deforestation legislation.