There is an increased expectation that the European Union Deforestation Regulation 2023/1115 (EUDR), which is currently scheduled to commence on 30 December 2024 and will prevent a number of Australian commodities from entering the EU market if they are linked to deforestation, may be deferred for 12 months.
The EUDR will prohibit certain Australian products from being placed or made available on the EU market, or exported from the EU market, unless the product:
- is deforestation-free;
- has been produced in accordance with the relevant legislation of the country of production; and
- is covered by a due diligence statement.
The European Commission has proposed to defer commencement of the EUDR to 30 December 2025, however, the proposal has not yet been adopted by the European Parliament and Council. The EUDR will be challenging to comply with, so many affected businesses will need extra time to prepare for increased due diligence requirements of EU businesses. In addition, global brands are already starting to include mandatory EUDR compliance in their purchase order terms so manufacturing businesses may need to start complying in advance of the extension.
Which Australian commodities are affected?
The EUDR applies to cattle, cocoa, coffee, oil palm, rubber, soya and wood and includes products derived from those commodities such as beef, leather, chocolate, palm oil, glycerol, clothing items made of vulcanised robber, wooden items, paper and books (Relevant Products).
A full list of Relevant Products can be found in Annex I of the EUDR.
The EUDR does not apply to goods if they are produced from material that has completed its lifecycle and would otherwise be discarded as waste. This exclusion does not apply to by-products of a manufacturing process unless the relevant by-product holder discards, or intends to discard, it as waste.
The legal requirements
The EUDR places due-diligence obligations on natural and legal persons who make Relevant Products available in the EU market (or export Relevant Products from the EU market). The requirements are different for EU ‘operators’ and ‘traders’, although both must be able to show that products do not originate from recently deforested land.
- Operator means any natural or legal person who, in the course of a commercial activity, places a Relevant Product on the EU market or exports a Relevant Product out of the EU. Operators will be required to implement a due diligence system and submit a due diligence statement before importing or exporting a Relevant Product. Operators must conduct a risk assessment of the Relevant Product and may only place it on the EU market if the assessment reveals no risk, or a negligible risk, of non-compliance with the EUDR requirements.
- Trader means any person in the support chain other than an operator who, in the course of a commercial activity, makes relevant products available on the EU market. Traders will include all companies that supply and distribute Relevant Products once they have entered the EU market (where they are not Operators). Traders must obtain all relevant due diligence information from Operators and keep the information for at least 5 years.
Small Medium Enterprises (SMEs) will be subject to less onerous obligations and, pending adoption of the deferral proposal, may not be required to comply with the EUDR until 30 December 2026. SMEs will be required to comply with record-keeping obligations rather than onerous due diligence processes. A business is an SME if it falls within the criteria of a micro, small or medium undertaking as outlined in Article 3 of Directive 2013/34/EU.
What is “deforestation-free”?
A product is “deforestation-free” if it (or its ingredients) was produced on land that has not been subject to deforestation or forest degradation since 31 December 2020.
- Deforestation occurs where forest is converted to agricultural use (whether human induced or not).
- Forest degradation occurs where there are structure changes to forest cover through the conversion of natural regenerating forests into plantations or other wooded lands.
For example, for beef exported to Europe, the EU will not accept beef derived from Australian cattle in circumstances where the cattle were raised on:
- land that was cleared for grazing from 2021 onwards;
- land that was cleared for agricultural use (and not left to regenerate) following a natural disaster such as a bushfire that occurred from 2021 onwards; or
- land that was transformed from a ‘primary forest’ to ‘wooded land’, in which case the forest has experienced structural change to the forest cover.
Penalties for non-compliance
EU Operators and Traders will be subject to strict penalties for non-compliance with the EUDR, including but not limited to:
- Fines that are proportional to the environmental damage and the value of the Relevant Products, but in any event a maximum of at least 4% of the trader or operator’s annual EU turnover;
- Confiscation of the Relevant Product or revenues gained from a transaction where the Relevant Products are concerned; and
- Temporary prohibition from making available or exporting Relevant Products (in the event of serious or repeated infringements).
The trend towards increased supply chain scrutiny
The EUDR is reflective of a broader theme of increased traceability and supply chain scrutiny. Companies are increasingly being required to report on their supply chains in relation to:
- greenhouse gas emissions and climate-related risks and opportunities as part of climate-related financial reporting;
- modern slavery; and
- food safety and integrity.
Separately to the EUDR, we are already seeing Australian companies such as Woolworths implement their own “deforestation-free” targets without government intervention.
Given increasing focus on traceability, all affected Australian businesses will need to require additional supply chain information including the history of the animal and product and related geo-location information and prepare for heightened due diligence standards. Detailed information will be required to pass through complex supply chains, and each member of the supply chain must prepare to request and record that information. For example, Australian exporters of leather handbags will be required to provide EU importers with all a geolocation history of the cattle the leather was derived from, including birthplace, all locations where the cattle were kept (on a temporary or permanent basis) until time of slaughtering.
Preparation for the EUDR will be a significant administrative task that affected Australian business should not delay preparation for, despite the proposed deferral of the commencement date.
At King & Wood Mallesons, we’re continuing to closely monitor developments related to increasing supply chain due diligence. Along with our advisory team Owl Advisory, we are also helping many companies prepare for reporting requirements. Please reach out if you need any assistance.
