INSIGHT by Edie Marriner, Researcher, Global Canopy
We are three years past the 2020 deadline that many organisations set themselves to halt deforestation, and just two years away from the UN’s deadline of 2025 for companies and financial institutions to eliminate commodity-driven deforestation and conversion. Yet globally, deforestation and demand for commodities linked to it is still growing.
Approximately 9 million hectares of forest is lost due to agricultural expansion every year. This agricultural driven deforestation is adding to climate change, causing biodiversity loss and is linked with human rights violations against Indigenous peoples and local communities.
The new EU regulation on deforestation-free products (EUDR) is a welcome and significant step in the efforts to eliminate deforestation. Without this intervention, the EU’s consumption and production of wood, cattle, soy, palm oil, cocoa and coffee would rise to around 248,000 hectares of deforestation annually by 2030.
The regulation means companies will need to know if and how they are exposed to commodity-driven deforestation, and mitigate that risk if they want to place a product on or export products from the EU market. And it has global implications too, because all companies that wish to access the EU market through their buyers or suppliers will also have to comply with this legislation.
The 350 companies included in the Forest 500 are the most exposed to the forest-risk commodities driving over two thirds of tropical deforestation (palm oil, soy, beef, leather, timber, pulp and paper), and with that comes a responsibility and opportunity to drive change through these supply chains.
| EU regulation requirements
The law will introduce mandatory due diligence for operators and traders placing (or exporting) a specific set of forest-risk commodities on the EU market demonstrating that these have been produced legally and on land not deforested after the end of 2020. The scope of commodities initially includes soy, cattle, palm oil, wood, coffee, cocoa and rubber as mainly raw commodities with some exceptions such as leather, chocolate and printed paper.
It’s expected that the law will come into force by June 2023, and companies will have 18 months (24 months for SMEs) before it is enforced. Non-compliant companies could face fines of at least 4% of their EU wide turnover in the following financial year.
| Plot-level traceability
In order to comply with the new law, all EU operators need to provide adequate and verifiable information in a due diligence statement that demonstrates that the products are legal and deforestation-free. Crucially this includes the geo-locations for all plots of land where the relevant commodity was produced.
However, the majority of the companies in the Forest 500 have not yet committed to trace their supply back to the plot-level.
>> This data includes companies that do not have a deforestation commitment for the specific commodity
Excluding palm oil, over 70% of companies across all commodities do not have a single traceability commitment, including the Toyota Group, Walgreens Boots Alliance, Costco, Royal Dutch Shell and H&M. Twelve percent of the Forest 500 companies have committed to trace commodities part-way through the supply chain (e.g. to a processing facility), but are not committed to tracing to the point of production. Without significant progress, those that currently do not trace to plot, will be unable to sell or trade in the EU by 2025.
The graph below compares the proportion of the Forest 500 that have at least a zero-gross deforestation commitment and a commitment to trace that commodity to the point of production by 2025 or sooner for each of the commodities.
>> Zero-gross deforestation/zero-net conversion/zero-gross conversion commitment AND a trace to point of production commitment WITH a target of 2025 or sooner for that commodity
Of all imports into the EU, products with beef, palm oil and soy drive the most deforestation. EU consumption of beef and soy are linked to several deforestation hotspots including the Brazilian Amazon, the Chaco in Argentina and Paraguay, and the Cerrado in Brazil (although these two biomes aren’t well covered in the legislation).
Only 5% of Forest 500 companies linked to beef, 6% for soy and 20% for palm oil have publicly committed to meeting the requirements of the EU regulation, on a voluntary basis. Across all commodities, only an average of 8% of companies most exposed to deforestation-risk have voluntary public commitments strong enough to be compliant with the new laws. That means most companies need to take swift and decisive action to become compliant with the soon mandatory requirements.
The companies that have made progress towards the incoming legislation include Unilever, Nestle and Cargill. They have already committed to achieve plot-level traceability by 2025 for at least one but not all of the forest-risk commodities that they are exposed to. Now their ambition must go a step further to encompass all of the commodities they are exposed to.
| Companies showing feasibility of plot-level traceability
The new EU legislation is more ambitious than the majority of existing voluntary commitments, meaning most companies have significant work to do. Requiring the laggards to make rapid progress towards producing or procuring deforestation-free commodities will create a much-needed level playing field, and help curb tropical deforestation. But there are some examples of pre-existing commitments which show compliance can be achieved, and highlight the way forward.
Over half of the companies that have a commitment to trace the supply chain to the point of production for one of the commodities they are exposed to, have already achieved this or are aiming to by 2025 or sooner. Amaggi, Harita Group and Suzano SA have committed to trace to the point of production of all commodities they are exposed to by 2025.
The vast majority of the Forest 500 companies have a lot of work ahead of them if they wish to operate in the EU market. But some key leaders prove that meeting these requirements is possible and progress can be made quickly. Companies not aligned with best practice must learn from those leaders to match the ambition of this regulation. They must publicly commit to achieving and begin implementing plot-level traceability across their supply chains; the incoming legislation provides a unique opportunity to level the playing field, and for companies to work together to drive progress and eliminate deforestation, conversion, and associated human rights abuses by 2025.
| All opinions expressed are those of the author and/or quoted sources. investESG.eu is an independent and neutral platform dedicated to generating debate around ESG investing topics.
