Chapada dos Veadeiros (Goiás, Brazil) 2020, by Helena Leonel Ferreira

On September 13, the European Parliament voted for significant amendments to the draft proposal of the European Commission for a regulation on deforestation-free products,  addressing many of the concerns raised by civil society in the past months. The modifications were suggested by the Parliament’s Committee on the Environment, Public Health and Food Safety (ENVI), and are included in their final report.  Among the major improvements, the European Parliament stressed the need to widen the scope of agricultural and forest commodities to include also natural rubber and maize, among others; extending the definition of “forests” to include other non-forest ecosystems  (such as the Cerrado savannah in Brazil); putting additional measures on financial institutions to ensure their activities do not back global deforestation. The Parliament proposal  also provided for the rights of indigenous peoples, local communities and smallholders and the protection of their territories, as well as stricter requirements for operators to undertake efforts to support smallholders’ compliance.

Beyond what has been debated and voted on in respect of these  general topics, the Parliament amendments  also touched on other key operational aspects that will directly affect European companies importing and exporting goods and products falling in the scope of the Regulation. This article aims to present and shed light on such changes to prepare the ground  for businesses facing  the upcoming rules. While all modifications would worth the discussion, only the major ones affecting companies will be discussed herein.

Enlarging the scope

The EU Parliament strengthened the EU Commission proposal by enlarging the scope of commodities,  shifting the cut-off date –  after which commodities and products must be “deforestation-free” –  one year earlier, extending the definition of “deforestation” and including financial institutions to prevent them from supporting projects and/or activities linked to deforestation, forest degradation or conversion.

EU Commission EU Parliament
Deforestation  “Conversion of forest to agricultural use, whether human-induced or not” “Conversion whether human-induced or not, of forests or other wooded lands to agricultural use or to plantation forest”
Deforestation-free Commodities and products, including those used for or contained in the products, were produced on land that has not been subject to deforestation, and wood that has been harvested without inducing forest degradation after December 31, 2020 Adds that commodities and products shall not have induced or contributed to forest conversion after December 31, 2019
Commodities scope Cattle, cocoa, coffee, oil palm, soy and wood, as well as products that contain, have been fed with or have been made using these commodities Adds swine, sheep and goats, poultry, palm-oil-based derivates, maize, rubber, and wood products, including charcoal and printed paper
Financial institutions Are not included in the scope Shall exercise due diligence prior to providing services to customers whose economic activities consist, or are linked to, the trading or placing on the market of the commodities and products within the Regulation’s scope

Obligations and Due diligence

The text adopted by the Parliament clarified and complemented many aspects of the operators’ and traders’ obligations within the Regulation, such as the need for engagement and participation of multiple parties (in particular the most vulnerable stakeholders), the due diligence statement and annual public reporting requirements. Moreover, the Parliament emphasized in the text the need for small and medium enterprises (SMEs) to be consulted, fully involved in the cooperation with third countries and assisted by the Commission, as compliance with the Regulation’s requirements may be more challenging for them. New information requirements were added in relation to the geo-localisation of production areas, as well as to tenure rights claims and views of indigenous peoples and local communities. Their presence and claims are also included as new criteria for risk assessment and risk mitigation procedures.

EU Commission EU Parliament
Due diligence statement Operators shall make available to the competent authorities a due diligence statement before exporting or placing the commodities and products on the Union market, confirming that no or only negligible risk was found and containing the information set out in Annex II (Article 4) Adds that the due diligence statements shall disclose the steps taken to verify the compliance of commodities and products and explain the assessment as to why no or only negligible risk was found; it also shall be electronically available for allowing administrative, civic and scientific scrutiny (Amendment 107)
Stakeholders engagement Absent from the text Adds on the necessity to engage with vulnerable stakeholders in their supply chain, especially smallholders, indigenous peoples and local communities, and ensure that they receive adequate assistance and remuneration for complying with the requirements and balancing the impacts of the Regulation (Amendment 114)
Reporting  The public reporting made by operators on an annual basis on their due diligence system shall include the steps taken to implement due diligence (Article 11) Adds to the due diligence reporting the measures taken to support smallholders’ compliance (Amendment 145), as well as specifications on reporting the steps taken and outcomes of due diligence (Amendment 146)

EU Commission EU Parliament
Due diligence Only operators which are not SMEs are required to publicly report their due diligence system on an annual basis (Article 11)

The other points are absent from the text

 Operators which are SMEs shall also publicly report their due diligence system on an annual basis (Amendment 145)

The Commission may provide technical assistance to SMEs which do not have the means to meet the requirements under Article 4 – Obligations of operators (Amendment 115)

It is clarified that SMEs are also to be considered operators whenever placing commodities and products under the Regulation’s scope in the EU market. (Amendment 118)

After a maximum of 12 months from the entry into force of the Regulation, the Commission shall issue user-friendly commodity-specific guidelines to clarify due diligence responsibilities of operators and traceability rules, tailored to fit their respective supply chains
Information requirements Operators shall collect information on the description of the products and commodities (trade name and type, common and scientific names); quantity; country of production; geo-localisation coordinates and time of production; supplier or buyer contact information; verifiable information that the product is ‘deforestation-free’ and produced in compliance with the legislation of the country of production (Article 9) Adds to the information requirements that the product’s description shall also include the list of commodities contained or used to make them, including  those used to feed the animals in case of animal products (Amendment 121); verifiable information that the area of production is not subject to any disputes or claims of indigenous, customary or other legitimate tenure rights (Amendment 125)
Risk assessment and mitigation Risk assessment criteria include: the assignment of risk to the country of production (benchmarking); the presence of forest in the country and area and of production and prevalence of deforestation or forest degradation; concerns in relation to the country of production and origin; the complexity of the supply chain; substantiated concerns; and complementary information, such as certification schemes (Article 10) Adds as a risk assessment criterion the presence of vulnerable peoples in the production country, such as indigenous and local communities, and as risk mitigation measures that operators shall provide for the participation and consultation of these people (Amendments 131 and 141)
Geolocation Defined by latitude and longitude of all plots of land where the relevant commodities and products were produced. Plots of land can be geo-localised either by a single point of latitude and longitude or by all points of a polygon. The size threshold from which plots of land will necessarily be geo-localised by polygons will be defined by the Commission (Amendment 123)

Checks and Penalties

The percentages of checks to operators and the quantities of commodities and products being placed on the Union market, or exported from it, have increased. Moreover, new penalties were imposed for non-compliance and the maximum amount of fines in relation to operators’ and traders’ turnover was increased. Last but not least,  a list of non-compliant operators and traders shall be published by the Commission, publicly available and periodically updated.

EU Commission EU Parliament
Checks in Member States Shall cover at least 5% of the operators placing, making available on, or exporting from, the Union market each of the relevant commodities and products, as well as 5% of the quantity of each relevant commodity and product (Article 14)

Checks shall cover at least 15% of operators and 15% of the quantity of each commodity and product coming from countries categorised as high-risk (Article 20)

 Shall cover at least 10% of the operators and traders placing or making available on, or exporting from, the Union market relevant commodities and products, as well as 10% of the quantity of such commodities and products. Checks are reduced to 5% for commodities and products  from countries categorised as low-risk in the benchmark. Checks shall cover at least 20% of operators and 20% of the quantity of each commodity and product coming from countries categorised as high-risk (Amendments 161 and 180)
Penalties Fines are proportionate to the environmental damage and the value of the relevant commodities or products concerned, being increased gradually for repeated infringements, with the maximum amount being at least 4% of the operators or trader’s annual turnover in the Member State concerned.

They shall include the confiscation of the commodities and products from the operator and/or trader, as well as  of revenues gained from their  transaction, the temporary exclusion from public procurement processes (Article 23)

 Adds that fines shall be also proportionate to the economic damage for local communities, and the maximum amount of at least 8% of operators and traders’ annual turnover.

In addition to the exclusion from public procurement processes, operators and/or traders shall be excluded from access to public funding, including tendering procedures, grants and concessions.

Also adds to what fines shall include: the obligation to restore the environment; to compensate for damage done to anyone that the exercise of due diligence would have avoided; prohibition from placing or making available commodities and products on the Union market, or exporting them, in the case of serious or repeated infringements, as well as from undertaking a simplified due diligence procedure (Amendments 188, 189, 190, 191, 192 and 193)

Countries benchmarking and regulation reviews

The Parliament defined the deadline for the Commission to publish the countries benchmarking list. It also provided more details on how the review made by the Commission on the Regulation shall be made, reducing time frames and including new elements to be evaluated, such as the possibility of extending its scope.

EU Commission EU Parliament
Countries benchmarking The Commission will publish a list of countries or parts thereof that present a low, standard or high risk of producing non-compliant commodities or products. The list will be updated as necessary in light of new evidence and concerned countries will be notified  by the Commission of its intent to change their risk category and invite them to provide any useful information in this regard as well as a response, such as information on measures taken to remedy the situation in case of a change to a higher risk category (Article 27) Adds that the list will be published within six months of the Regulation’s entry into force.

Adds that the Commission shall also notify concerned regional authorities, operators and traders of intended changes in the risk category and that regional authorities will also be invited to provide a response for possible changes.

In addition, the Commission shall carry out a public consultation to gather information and views from interested parties, in particular indigenous and local communities, smallholders and civil society organisations, when intending to change a country’s risk category (Amendments 202 and 211)
Review The Commission shall carry out a first review no later than two years after the Regulation’s  entry into force and present a report to the European Parliament and Council evaluating the need and feasibility of extending the scope to further commodities and to other ecosystems, such as grasslands and wetlands

After five years of the Regulation’s entry into force, the Commission shall develop a report with an evaluation of: the need for additional tools to support the achievement of the Regulation’s objectives; the impact of the Regulation on farmers, particularly on vulnerable actors, and the possible need for additional support for the transition to sustainable supply chains (Article 32)

 Adds that the Commission shall present an impact assessment to extend the scope  of the Regulation to other natural ecosystems, no later than one year after its entry into force

Adds to the evaluation of the need and feasibility of scope extension, in particular, additional products derived from the commodities already covered by the Regulation, sugar cane, ethanol and mining products will be considered. Moreover, the Commission’s evaluation of the need for additional supporting tools and on the impact on farmers will be carried out after two years, instead of five (Amendment 227)

Adds that the Commission shall continuously review its application and monitor changes in the trade patterns, paying attention to possible practices of circumvention (Amendments 227 and 232)

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