What is the European Union Deforestation Regulation (EUDR) and How Will It Impact Global Timber Supply Chains?

Executive Summary

The European Union Deforestation Regulation (EUDR) aims to curb global deforestation by regulating the import and trade of certain commodities, including timber, within the EU market. This guide explains EUDR's objectives, its impact on timber supply chains, and practical compliance steps for businesses.

What is the European Union Deforestation Regulation (EUDR)? A Complete Guide for Businesses

The European Union Deforestation Regulation (EUDR) is a landmark legislative effort by the EU to combat global deforestation. As climate change and biodiversity loss continue to be pressing concerns, EUDR aims to eliminate products linked to deforestation from the EU market. Timber, being a significant commodity in this discussion, is heavily impacted by the EUDR, which demands that businesses operating in or importing into the EU provide evidence that their products are not contributing to deforestation.

Product Groups Governed by the EUDR

The EUDR governs a range of product groups that are linked to deforestation:

• Timber and Timber Products: Any form of wood, including raw logs, sawn wood, and processed wood products.
• Cocoa: Cocoa beans and related products used in chocolate manufacturing.
• Soy: Used widely as animal feed and in processed foods.
• Palm Oil: A common ingredient in food, cosmetics, and other consumer goods.
• Coffee: Coffee beans and related products.
• Rubber: Natural rubber used in a variety of industries.
• Cattle: Beef and cattle-derived products such as hides.

These product groups are targeted because they have historically been linked to significant deforestation, driven by high demand and unsustainable production practices. By focusing on these commodities, the EU aims to reduce deforestation and promote sustainable sourcing practices across multiple sectors.

Understanding EUDR: Key Components and Objectives

EUDR replaces the European Union Timber Regulation (EUTR) and broadens its scope to include additional commodities. Its primary objectives are:

• Prevent deforestation-linked products from entering the EU market.
• Promote sustainable sourcing and traceability in supply chains.
• Encourage global actors to adopt deforestation-free practices.

Key Components of EUDR

• Due Diligence System: Businesses must establish a due diligence system to demonstrate that the commodities they source are deforestation-free. This system requires companies to gather and verify information about their supply chains, assess risks, and mitigate any identified risks.
• Due Diligence Statement: Companies must submit a due diligence statement to authorities, confirming that their products comply with EUDR requirements on the EU Deforestation Due Diligence Registry. This statement acts as a declaration that the company has conducted the necessary checks and can verify that its products are sourced responsibly.
• Geolocation Requirements: Companies must identify the plot of land from where the raw material was harvested.

Timeline and Implementation Deadlines

The EUDR is set to roll out in stages. Below are key dates to be aware of:

• 2023: Initial adoption of EUDR by the EU Parliament.
• December 2025: Compliance requirements for large companies come into effect.
• June 2026: Small and medium enterprises (SMEs) must begin compliance efforts. This exception is not valid for materials currently governed by the EUTR, e.g. timber.

This phased approach provides a gradual transition for different-sized businesses to adapt their supply chains.

Impact on Global Timber Supply Chains

The introduction of EUDR has significant implications for the global timber supply chain, both for producers and businesses importing timber products into the EU.

• Supplier Challenges: Timber suppliers, especially from regions with high deforestation rates, may struggle to meet EUDR's stringent criteria. Many suppliers will need to improve traceability measures and obtain third-party certifications. Smallholders, in particular, may face difficulties due to limited resources, lack of technical expertise, and challenges in accessing certification programs.
• Trade Shifts: Businesses might need to seek new suppliers that align with EUDR standards, potentially shifting the dynamics of global timber trade.
• Higher Costs: Ensuring compliance with EUDR, such as implementing geolocation tracking and due diligence, could lead to increased costs throughout the supply chain.

EUDR is expected to have a ripple effect beyond the EU, as global suppliers adjust their practices to maintain access to the lucrative EU market. Non-EU countries that supply timber will need to adapt to the new standards, potentially leading to broader changes in forestry practices worldwide.

The regulation also impacts downstream industries, such as furniture and construction, which rely heavily on imported timber. These industries will need to reassess their supply chains and establish new relationships with compliant suppliers. This may lead to changes in product availability, potential delays in sourcing materials, and an increased focus on alternative, sustainable materials.

Compliance Requirements for Businesses

Businesses importing timber to the EU but also companies producing inside the EU must implement a due diligence system to trace timber origins back to non-deforestation zones. The due diligence system should govern how the company performs three critical steps to comply with the EUDR:

• Information gathering about the product and supply chain. This involves collecting detailed geolocation data for each plot of land from which the material originates.
• Risk assessment for each product batch, evaluating the risk of deforestation and illegality of the product. This should include considering factors such as the risk of the origin country and the specific supply chain.
• Risk mitigation if any risks are uncovered in the risk assessment stage.

Goods can only be placed on the EU market if the risk assessment concludes negligible, i.e., minimal risk of breaching the requirements of the EUDR. If this minimal risk is concluded, the company should submit a due diligence statement to the EU's repository.

Companies solely trading timber on the internal EU market face lighter requirements and may only need to keep track of the due diligence statements made by prior actors in the supply chain.

In short, the Regulation is based on a fundamental principle: prohibiting the introduction, marketing, or export of relevant commodities and products unless they meet three key conditions:

• No contribution to deforestation: They do not contribute to deforestation or forest degradation.
• Compliance with local laws: They are produced in accordance with the relevant legislation of the country of production, including compliance with environmental, land-use rights, forest management, labor, tax, and human rights laws.
• Due diligence statement: They are covered by a due diligence statement.

For businesses, compliance with EUDR also involves continuous monitoring and updating of their supply chains. This means establishing mechanisms to regularly audit suppliers, identify any non-compliance issues, and take corrective actions where necessary. Businesses that fail to maintain rigorous oversight may face significant penalties, including fines and restrictions on their ability to trade within the EU.

Exceptions for SMEs

To ease the burden on smaller businesses, the EUDR includes specific exceptions for SMEs:

• Simplified Due Diligence Process: SMEs are subject to less stringent due diligence requirements compared to larger corporations.
• Extended Deadlines: SMEs have additional time beyond the general implementation date to comply. However, this does not apply to timber and other products currently in the scope of the European Union Timber Regulation.

Despite these exceptions, SMEs must still demonstrate that their products are deforestation-free. Even smaller companies will need to establish basic traceability and risk assessment processes, although the required level of detail is reduced. Essentially, in many cases, they will only need to collect the due diligence statement reference numbers from their suppliers. However, downstream actors might not benefit from these exceptions and may require detailed information from the company's suppliers. Furthermore, in case of a breach of the regulation, an SME is still fully liable.

How to Adapt Your Supply Chain for EUDR

To align with the EUDR, businesses can consider the following strategies:

• Map the Supply Chain: Understand where the goods you buy come from and see if you can map the chain all the way to the source.
• Audit Current Suppliers: Evaluate current suppliers for compliance and consider alternatives if they do not meet EUDR standards.
• Invest in Traceability Tools: Implement digital tools to maintain accurate geolocation data.
• Collaborate with Industry Peers: Partner with other businesses or join industry initiatives focused on sustainable sourcing and compliance.
• Develop Supplier Training Programs: Educate suppliers on EUDR requirements and best practices for sustainable forestry. Providing training materials and workshops can help suppliers understand compliance needs and improve their operations accordingly.

Early preparation for EUDR compliance is crucial, as engaging the entire supply chain takes considerable time and effort. Businesses must start preparing well in advance to ensure all stakeholders understand the requirements and are willing to comply. This involves educating suppliers, implementing traceability tools, and building transparent relationships that facilitate compliance. The earlier companies begin adapting, the more time they have to address any challenges that arise, making the transition smoother and reducing the risk of non-compliance.

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Cost Implications and Business Considerations

Complying with the EUDR will have cost implications, including:

• Technology Investments: Purchasing software for traceability, such as blockchain or advanced GIS systems.
• Certification Costs: For some businesses, obtaining third-party certifications may be necessary to demonstrate compliance.
• Training and Resources: Staff training and expanding due diligence teams may also add to operational costs.

However, these costs can also be seen as investments into long-term sustainability, which could improve market competitiveness and brand value.

Benefits of Compliance:

• Enhanced Market Access: Compliance with EUDR will ensure continued access to the EU market, which is one of the largest timber importers globally.
• Brand Reputation: Demonstrating commitment to sustainability can enhance brand reputation and appeal to environmentally conscious consumers.
• Operational Resilience: By implementing robust traceability and risk management systems, businesses can become more resilient to future regulatory changes and supply chain disruptions.

Challenges:

• Administrative Load: Smaller businesses may struggle with the increased administrative workload required for compliance, including documentation, monitoring, and reporting. Managing traceability records and due diligence statements can be a significant burden without adequate resources.
• Supply Chain Complexity: Businesses with complex supply chains may find it challenging to trace every product back to its origin, particularly when dealing with multiple suppliers across different regions.
• Supplier Resistance: Suppliers, particularly those in high-risk regions, may be resistant to change due to the costs and complexities involved in meeting EUDR requirements.

FAQ Section

1. What are the main commodities covered by EUDR?

• Timber, cocoa, soy, palm oil, coffee, rubber, and cattle are among the main commodities covered. Also derived products like beef, furniture, or chocolate are included.

2. How does EUDR differ from EUTR?

• EUDR has a broader scope than EUTR, includes more commodities, and requires stricter geolocation data for traceability. The EUTR focused on legality of timber while the EUDR also takes into consideration deforestation.

3. What are the penalties for non-compliance?

• Businesses found non-compliant could face substantial fines. Penalties may also include restrictions on market access and reputational damage, which could affect customer relationships and sales.

4. Can SMEs avoid compliance altogether?

• No, SMEs must still comply but benefit from simplified requirements and extended timelines.

5. How can businesses ensure compliance with EUDR?

• Businesses should implement a due diligence system, maintain geolocation data, and work with certified suppliers to ensure compliance.

6. How will EUDR affect non-EU suppliers?

• Non-EU suppliers will need to align their practices with EUDR standards to maintain access to the EU market. This may involve investing in traceability systems and obtaining certifications.

7. What support is available for SMEs to comply with EUDR?

• There are significant exemptions for SMEs in most cases. Using tools that facilitate record keeping and risk assessment may also be a good idea.

Actionable Next Steps for Businesses

1. Start Mapping Supply Chains: Identify where your timber is sourced and assess any deforestation risks.
2. Engage Suppliers: Communicate EUDR requirements to suppliers and collaborate to address compliance gaps.
3. Invest in Compliance Tools: Utilize digital traceability solutions to manage due diligence effectively.
4. Stay Updated: Follow the latest developments in EUDR and adapt strategies as more guidelines are released.
5. Seek Certifications: Obtain third-party certifications where applicable to support compliance claims.
6. Develop a Compliance Team: Establish a dedicated team to oversee compliance efforts, conduct risk assessments, and ensure all documentation is up to date.

Conclusion

The EUDR represents a significant regulatory shift in the EU's efforts to eliminate deforestation-linked products from its market. Businesses involved in the timber supply chain must act proactively to ensure compliance, understanding the regulation's requirements and adapting their supply chains accordingly. Although compliance will involve upfront costs, these investments contribute to building a more sustainable and competitive business model in the long run.

The regulation's impact extends beyond the EU, encouraging global suppliers to adopt sustainable practices. By embracing these changes, businesses can not only maintain market access but also contribute to the broader goal of combating deforestation and protecting the environment for future generations. Moreover, the EUDR offers an opportunity for companies to demonstrate leadership in sustainability, differentiate themselves in the marketplace, and appeal to a growing base of environmentally conscious consumers.

The path to compliance with EUDR requires careful planning, investment in technology, and a commitment to transparency throughout the supply chain. By taking these steps now, businesses can position themselves as leaders in the fight against deforestation and secure a resilient future in an increasingly regulated global market.