EUDR Obligations for Companies
The EUDR targets key commodities linked to deforestation including palm oil, soy, cattle, coffee, cocoa, rubber, and wood. These products are widely used in various industries, from food and cosmetics to furniture and biofuels.
The regulation becomes applicable on 30th December 2024 and applies to companies placing these commodities, or products thereof on the EU market, or exporting them from it. They will need to demonstrate that their products are deforestation-free, and not linked to forest degradation, nor illegal harvesting and trade by establishing a Due Diligence system.
The Due Diligence Requirement
The EUDR introduces a due diligence system that obligates companies to take active steps in ensuring compliance with the regulation. The due diligence process is multifaceted and involves several key steps:
- Gathering information: Companies are required to trace their products back to the origin and demonstrate the exact supply chain actors the products go through. This involves gathering detailed information on the commodities, including the exact geographic location where they were produced. Geolocation data is crucial for verifying that the land has not been subject to recent deforestation.
- Risk Assessment: Companies must assess the risk of deforestation and illegal activities in their supply chains covering various requirements the EUDR has set out.
- Risk Mitigation: If a company identifies a risk of deforestation or illegality, it must implement mitigation measures. This could involve sourcing from different suppliers, engaging in more thorough audits, or investing in more sustainable agricultural practices.
- Reporting and Transparency: Companies are required to maintain transparent records of their due diligence activities and report them to the relevant authorities. The EUDR mandates that companies provide accurate and verifiable information to demonstrate their compliance, promoting transparency and accountability in global supply chains.
- Penalties for Non-Compliance: The EUDR imposes significant penalties for non-compliance. Companies found to be in violation of the regulation may face fines, bans from the EU market, and other enforcement actions. This strict enforcement mechanism underscores the EU's commitment to ensuring that the regulation has real-world impacts.
Challenges and Implications for Businesses
While the EUDR sets a high bar for environmental and legal compliance, it also presents significant challenges for businesses, particularly those with complex, global supply chains. The requirement to obtain precise geolocation data and verify compliance across multiple tiers of suppliers can be resource-intensive.
Understanding and implementing the EUDR Due Diligence requirements can be very daunting for smaller companies.
For many companies it is also very unclear if the EUDR applies to them and what their obligations are. That is why at Certain we have been helping our clients to stablish Due Diligence systems and make all the necessary risk assessments to meet the EUDR needs.
To make things easier, we’ve developed a clear and concise flowchart that simplifies the process of determining your obligations under the EUDR. Our flowchart is designed to help your business quickly and accurately identify whether you are an operator or a trader and if you qualify as an SME. It’s just one of the many tools we provide to streamline your path to compliance.
Determining Your obligations Under the EUDR
Understanding your role under the EU Deforestation Regulation (EUDR) is crucial for compliance. The flowchart below helps companies determine whether they are considered "operators" or "traders" under the regulation and whether they qualify as Small and Medium-sized Enterprises (SMEs).
Here's a step-by-step explanation of how the flowchart works:
1. Identify the Commodity
Is the HS code of the commodity you deal with listed in Annex 1 of the EUDR?
Annex 1 includes key commodities, linked to deforestation and their description as classified in the Combined Nomenclature set out in Annex I to Regulation (EEC) No 2658/87, such as palm oil, soy, cattle, coffee, cocoa, rubber, and wood.
Identifying the commodity is the first critical step. Annex 1 of the EUDR specifically lists the commodities that fall under the regulation’s scope. If your commodity is not listed, you are not subject to the EUDR's requirements.
If Yes, proceed to the next step.
If No, the EUDR does not apply to your commodity, and no further action is required under this regulation.
2. Determine Your Business Size: SME or Non-SME
The EU Deforestation Regulation (EUDR) recognizes that companies vary greatly in size and capacity, and it differentiates between enterprises accordingly to ensure that the regulatory burden is proportional to their resources.
The EUDR specifically distinguishes between Small and Medium-sized Enterprises (SMEs) and larger enterprises, adjusting the compliance requirements based on this classification.
The differentiation between SMEs and larger enterprises is based on the principle of proportionality, which aims to balance the regulation’s effectiveness with the capacity of businesses to comply. By tailoring the requirements according to enterprise size, the EUDR seeks to:
- Encourage Compliance Across the Board: Even smaller businesses are brought into the regulatory framework without being overburdened.
- Leverage Larger Companies' Resources: Larger companies, with more resources and influence, are expected to take on a greater share of the responsibility in combating deforestation.
If you do not exceed two of the three criteria mentioned in the flowchart for SME enterprises you can qualify as an SME enterprise which will give you different obligations in terms of record keeping, transparency and due diligence.
SMEs enjoy lighter regulatory requirements but still must adhere to key principles of transparency and compliance.
Compliance Requirements for SMEs
- Record-Keeping and Transparency: SMEs are still required to maintain accurate records of their transactions and ensure that the products they handle have been through due diligence. However, the regulatory burden is somewhat reduced compared to larger companies.
- Due Diligence: SMEs that are operators (first to place a product on the EU market) are required to conduct due diligence, though the EUDR recognizes that SMEs might not have the same capacity to implement large-scale risk assessment and mitigation processes.
Compliance Requirements for Non-SMEs (Larger Enterprises)
- Full Due Diligence: Larger enterprises are expected to implement a comprehensive due diligence system. This includes:
- Detailed Risk Assessment: Gathering extensive information, including geolocation data, to verify that products are not linked to deforestation and comply with local laws.
- Risk Mitigation: Larger companies must take proactive steps to mitigate identified risks, which may involve sourcing changes, supplier engagement, or investment in sustainable practices.
- Reporting Obligations: Non-SMEs are also required to submit detailed reports to the relevant authorities, demonstrating their compliance with the EUDR. These reports must be more thorough and frequent compared to those required from SMEs.
3. Determine Your Role: Operator or Trader
- OPERATORS are the companies or entities that first place a product covered by the EUDR on the EU market (this can be through import from a non EU country or by farming or extracting the resource on EU soil). Their responsibilities include ensuring that the product complies with the EUDR’s requirements before it enters the market. The key characteristics and obligations of operators are:
Primary Responsibility: Operators are responsible for conducting due diligence on the products they place on the market. This means they must verify that the commodities are "deforestation-free" and legally produced according to the laws of the country of origin.
Due Diligence Requirements: Operators must gather detailed information about the product's supply chain, including geolocation data to ensure that the land where the commodity was produced was not subject to deforestation after December 31, 2020. They must assess and mitigate risks of deforestation and illegal production.
Compliance and Reporting: Operators are required to maintain records of their due diligence activities and provide reports to the relevant authorities. Their due diligence process must be thorough and capable of demonstrating compliance with the EUDR.
- Downstream OPERATORS refer to entities further along the supply chain that handle, process, or distribute products that have already been placed on the EU market by an operator but change the HS Classification code from their raw materials to their end product. The responsibilities of downstream operators are generally less extensive than those of primary operators, but they still have important obligations:
Verification Responsibilities: Downstream operators are required to ensure that the products they handle have been through the necessary due diligence by the initial operator. They must confirm that the products they are selling or distributing comply with the EUDR.
Record-Keeping: While downstream operators do not conduct the initial due diligence, they are required to keep records that trace the products back to the operator who conducted due diligence. This is crucial for maintaining transparency and traceability within the supply chain.
Lower Regulatory Burden: The EUDR imposes a lighter regulatory burden on downstream operators compared to primary operators. Downstream operators are not responsible for the initial risk assessment and mitigation but must ensure that they only deal with products that have already been verified as compliant.
- TRADERS deal with products already on the market and have fewer due diligence obligations.
To summarize...
The EU Deforestation Regulation is a legislation that places sustainability at the forefront of global trade. Through its due diligence requirements, the EUDR aims to decouple economic growth from environmental degradation, fostering a market for deforestation-free products.
Moreover, the EUDR is expected to have a ripple effect, encouraging non-EU countries to strengthen their own environmental regulations and prompting global shifts towards more sustainable agricultural and forestry practices.
For businesses, the EUDR necessitates a proactive approach to managing supply chains and ensuring compliance with environmental legislation. For most companies, navigating the complexities of the EU Deforestation Regulation (EUDR) can be daunting, but we, at Certain, are here to help. As experts in regulatory compliance, we specialize in guiding businesses through the intricacies of the EUDR, ensuring that your products meet the necessary standards and that your operations remain fully compliant.
While the challenges are substantial, the long-term benefits of aligning with the EUDR are clear, contributing to the preservation of the world’s forests, protecting biodiversity, and supporting the transition to a sustainable global economy.
Do you need to assess your next steps to implement EUDR? Contact us at info@groepsmanager.com.
