Food Regulation Highlight: 5 Key takeaways on the new EU Deforestation Regulation

1 November 2023

Extraterritorial effect

More and more, EU regulations seem to have an extraterritorial effect. This is certainly the case for the Deforestation Regulation. The responsibility to ensure that no deforestation is taking place within the supply chain is shifted to companies based in the EU. However, the biggest impact of complying with the requirements will presumably be felt outside the EU. Suppliers and farmers will be indirectly burdened to prove compliance and meet informational requirements, which can be challenging and could increase the costs of bringing their products to the market.

Future use of certification

While formal legislation often replaces the private market of certifications and standards with a uniform framework, the Deforestation Regulation does not. It provides a legal framework for existing and new certifications. Companies may still use certifications to assess their impact and prove compliance with the Deforestation Regulation. However, no guidance has been formulated for the standard for due diligence certifications to be considered valid yet.

Hidden costs of compliance

The costs and complexity of conducting due diligence, as required by the Deforestation Regulation, are significant and should not be underestimated. Companies operating in and with the EU will need to collect data from various parties across the food value chain. This will be particularly challenging for large, international supply chains with multiple layers and smaller stakeholders. Collaboration will be essential for a successful due diligence, but the question remains who will have to pay these costs.

From transparency to action

The Regulation requires a thorough due diligence process to identify the adverse impacts in the supply chain, such as the impediment of indigenous rights. How will EU companies respond to the identified adverse impacts? For instance, will they change suppliers if they cannot guarantee deforestation-free products? And will they collaborate with suppliers to mitigate the identified adverse impacts?

Potential unintended consequences

The Deforestation Regulation's reach beyond Europe, and the need for high-quality data collection, could have unintended negative consequences. For instance, there is a risk of companies shifting their production to regions with lower compliance costs. This could mean that small food producers will disappear from the global supply chains, and that food production will be centralized. Also, if sales in the EU becomes more costly, this could impact the EU’s trade position.

Steps to take for food and agri companies

The following steps will be key for all EU-based food & agri companies trading in cattle, cocoa, coffee, oil palm, rubber, soya and wood, as well as products derived from these commodities.

• Set up an evaluation framework and identify data sources.
• Do a baseline assessment of available data and identify gaps.
  
• Determine an action plan to resolve gaps including a potential partnership.
  
• Develop a reporting structure in compliance with the regulation.
  

Summary

The Deforestation Regulation is a positive and necessary step forward in addressing the urgent global issue of deforestation. By mandating stringent due diligence and transparency measures, it aims to halt the adverse impacts on nature and communities. However, additional guidance is needed on how to overcome data collection challenges in complex supply chains, how to deal with the costs of due diligence and certification, how to cope with the risk of food production centralization, and on its potential impact on the EU’s market position. 

For further information or advice on how to get ready for the Deforestation Regulation, please contact our experts via the contact details below.