New Law in Europe to Fight Deforestation: Impacts and Opportunities for Australian Producers, Companies and Consumers
Market Insight 13 June 2023 13 June 2023
Energy & Natural Resources
Primary forests are unique and irreplaceable. Plantation forests and planted forests have a different biodiversity composition and provide different ecosystem services compared to primary and naturally regenerating forests. A new EU law now requires companies to have due diligence on sourcing certain products and commodities to protect the world’s primary forests.
The harm to our environment from deforestation
Loss and degradation of the world’s forests is one of the biggest risks to the environment as it is a major threat to biodiversity and accelerates climate change.2 Forests provide livelihoods to indigenous peoples and local communities who rely on forest ecosystems.3 These communities are the most vulnerable to effects of deforestation.4
Nearly a third of the earth’s land surface is forest (estimated in 2020 to be 4.06 billion hectares),5 with Australia having 3% of global forests.6 Over the last 30 years 420 million hectares of the world’s forests have been cut down.7 The overall net reduction is 178 million hectares (approximately a 4.5% reduction) with the highest losses being seen in Africa, followed by South America.8 In Australia, we have seen a slight increase to our overall forested areas between 1990 and 2020.9 This is due to reforesting of land – but 81% of this planted forest is plantation forest.10 The extent of naturally regenerating forest in Australia saw a large increase between 2010 and 2020, but it is yet to offset the reductions seen between 1990 and 2010.11
Primary production of agricultural and industrial commodities, logging and land clearing are significant contributors to global deforestation.12
FIGURE: The global distribution of forests by climatic domain.13
Due Diligence of Supply Chain: New Requirements in the European Union (EU)
In April 2023, the European Parliament passed a landmark deforestation law that bans certain products and commodities from being supplied to Europe unless deforestation due diligence requirements have been met. The new law requires companies to provide verifiable details about when and where commodities were produced and a statement that they were not produced on land that was deforested after 2020.14
The motivation behind the new law is to protect forests15 (particularly primary forests)16, fight climate change and combat biodiversity loss by preventing commodities entering and being sold in Europe that have been produced on deforested land.
Until today, our supermarket shelves have all too often been filled with products covered in the ashes of burned-down rainforests and irreversibly destroyed ecosystems and which had wiped out the livelihoods of indigenous people.17
Rapporteur Christophe Hansen, European Parliament (Press Release, 19 April 2023)
Scope of the deforestation due diligence law
The law targets raw and derived products and commodities that disproportionately contribute to deforestation18 and forest degradation.19 These products and commodities include:
|Wood||Palm oil and various derivatives|
|Printed paper products||Coffee|
The European Parliament have noted several possible extensions to the scope of the law to include:
- more targeted products and commodities such as maize and biofuels;
- other natural ecosystems beyond just forests, such as “other wooded land”; and
- imposing specific obligations on financial institutions.21
The law will also result in the classification of countries under a benchmarking system based on the risk that deforestation occurs in the country’s industrial production processes.22 This risk-based approach intends to make it easier for authorities to identify and prevent products entering the EU that have contributed to deforestation.
The country benchmarking system will require the European Commission to primarily consider:
- rate of deforestation and forest degradation in the country;
- rate of expansion of agricultural land for targeted commodities in the country; and
- production trends of targeted commodities and products in the country.23
The European Commission can also consider:
- information submitted by a country, regional authorities, operators, NGOs and third parties, including indigenous peoples, local communities and civil society organisations about the effects of emissions and forest removal from agriculture, forestry and land use in the nationally determined contribution to the UNFCCC;
- agreements and other instruments between a country and the EU and/or its Member States that address deforestation and forest degradation and facilitate compliance of targeted commodities and products and their effective implementation;
- whether a country has national or subnational laws and effectively enforces them to tackle deforestation and forest degradation. This includes penalising activities leading to deforestation and forest degradation and applying those penalties with sufficient severity to disincentivise deforestation or forest degradation activities;
- whether a country provides transparent data, including the existence, compliance with, or effective enforcement of laws protecting human rights, the rights of indigenous peoples, local communities and other customary tenure rights holders; and
- whether there are any sanctions imposed by the UN Security Council or the Council of the European Union on imports or exports of the targeted commodities and products.24
Who does it apply to?
The new law applies to ‘operators’ who directly place targeted products on the EU market or exports them25, and ‘traders’ which includes any company in the supply chain that makes targeted products available on the EU market.26 Persons established in non-EU member states that place relevant products on the market are not considered to be ‘operators’. Rather, the first person established in the EU who makes such relevant products available on the market will be deemed to be the operator for the purpose of compliance with the due diligence and other requirements under the new law.27 The scope of activities captured by operators and traders includes processing the targeted products, distributing the targeted products to commercial or non-commercial consumers, and using the targeted products for use in its business.28
Timeframes to comply and possible penalties
The law will come into effect on 29 June 2023. Large companies will then have 18 months to comply, and smaller companies will have 24 months.
If companies do not comply with the new obligations they will face fines of up to 4% of the company's turnover in an EU member state.
Impacts for Australian producers, companies and consumers
Historically there has been deforestation associated with commodity production in Australia, particularly in agriculture, timber production and mining. There are now strict regulations and management processes in place to minimise the impact of land use activities on natural ecosystems, including natural forests. Many farmers and land managers are also actively working to adopt sustainable land management practices to ensure the long-term viability of their businesses and reduce the impact of their activities have on natural ecosystems and biodiversity.
In recent years the impacts of primary forest loss on our koala populations have garnered international attention and concern, and been politically significant in affected states like NSW.
For now, Australian companies and producers should familiarise themselves with the new EU due diligence requirements to understand how it may impact on their ability to continue to feed into the supply chain of commodities and products destined for the EU market. This may be particularly pertinent for those involved in timber products (including logs, wood chips, sawn timber and derived products such as charcoal and furniture) and beef and leather.
Also, companies that import raw products, such as palm oil, rubber, cocoa and coffee to make a product which is destined for the EU market should be considering the implications of the new law.
The new law should provide an opportunity to sustainably sourced targeted commodities to replace those that are linked with deforestation. Australian producers of targeted products and commodities should see this as an opportunity to improve their position in relation to EU market penetration.
The Clyde & Co Approach to ESG
At Clyde & Co, our team has specialist expertise in advising and acting for organisations on all aspects ESG related issues including environment & climate change, employment & work health and safety and governance.
Clyde & Co is one of the few global firms that can advise organisations on ESG related compliance and proactive systems and frameworks in-house.
Our approach is to consider ESG in a holistic way. We understand that the true benefits from ESG compliance come when organisations view it as more than the sum of its parts.
If you have any queries in relation to the new EU law and ESG more broadly, please do not hesitate to contact us.
1European Parliament legislative resolution of 19 April 2023 on the proposal for a regulation of the European Parliament and of the Council on making available on the Union market as well as export from the Union of certain commodities and products associated with deforestation and forest degradation
2Chakravarty, S., Ghosh, S.K., Suresh, C.P., Dey, A.N. and Shukla, G., 2012. Deforestation: causes, effects and control strategies. Global Perspectives on Sustainable Forest Management, 1.
4Deforestation-Free Products Regulation.
6Ibid, FAO 14.
7Ibid, FAO 18.
8Ibid, FAO 15-18. Note. This figure is calculated by an estimated 420 million hectares of forest being lost through deforestation between 1990 and 2020 which is offset by afforestation efforts coupled with natural forest expansion and regrowth over the same period.
9Ibid, FAO 136.
10Ibid, FAO 157.
11Ibid, FAO 143.
12Chakravarty, S., Ghosh, S.K., Suresh, C.P., Dey, A.N. and Shukla, G., 2012. Deforestation: causes, effects and control strategies. Global Perspectives on Sustainable Forest Management, 7-11.
15Deforestation-Free Products Regulation, Article 2 Definitions clause (4) ‘forest’ means land spanning more than 0,5 hectares with trees higher than 5 metres and a canopy cover of more than 10%, or trees able to reach those thresholds in situ, excluding land that is predominantly under agricultural or urban land use.
16Ibid, Article 2 Definitions clause (8) ‘primary forest’ means naturally regenerated forest of native tree species, where there are no clearly visible indications of human activities and the ecological processes are not significantly disturbed.
18Deforestation-Free Products Regulation, Article 2 Definitions clause (3) ‘deforestation’ means the conversion of forest to agricultural use, whether human-induced or not.
19Ibid, Article 2 Definitions clause (7) ‘forest degradation’ means structural changes to forest cover, taking the form of the conversion of: (a) primary forests or naturally regenerating forests into plantation forests or into other wooded land; or (b) primary forests into planted forests.
21Deforestation-Free Products Regulation.
25Ibid, Article 2 Definitions clause (15).
26Ibid, Article 2 Definitions clause (17).
27Ibid, Article 7.
28Ibid, Article 2 Definitions clause (19).