Navigating EUDR Compliance with Ease

Navigating the complexities of global trade is challenging. If you are in the business of importing or exporting goods, the last thing you would want is to face legal trouble, reputation damage or supply chain disruptions due to non-compliance with regulations. So, what does EUDR Compliance entail? 

The EU Deforestation Regulations (EUDR) requires businesses to undertake a thorough due- diligence process, ensuring their products are sourced ethically and sustainably, free from deforestation. It’s your road map to navigating the complexities of sustainable global trade. 

According to WWF, EU is the second biggest importer of deforestation after China. In 2017, the EU was responsible for 16% of deforestation associated with international trade, totalling 203,000 hectares and 116 million tonnes of CO₂. 

In this blog, we will break down the intricacies of EUDR compliance, offering insights into data collection, risk assessment and risk mitigation steps businesses must take. Stay tuned to ensure your business sails smoothly through waters of ethical and sustainable trade. 

What is EUDR and its significance? 

The EU Deforestation-Free Regulation (EUDR) marks a fresh EU endeavour aimed at curbing global deforestation resulting from forestry and agricultural practices. Introducing mandatory due diligence requirements for EU businesses by 2024, this regulation significantly broadens the scope of, and is poised to eventually supplant, the existing EU Timber Regulation (EUTR). 

Being a major importer of commodities associated with deforestation, and recognizing its influential role, the deforestation regulation seeks to diminish the impact that products purchased by EU citizens have on global forests and woodlands. This initiative is integral to the journey toward achieving net-zero, and the EU aspires to set an example, potentially paving the way for similar regulatory requirements in other markets, including the UK. 

Whom does EUDR affect? 

Under the EU Deforestation-Free Regulation (EUDR), entities obligated to comply are categorized as ‘operators’ and ‘traders. 

Operators, representing companies introducing products into the single market, are mandated to execute due diligence within their supply chains, ensuring freedom from deforestation and forest degradation.  

On the other hand, traders are tasked with the responsibility of storing and disseminating supply chain information to operators. 

What are the products and regions affected? 

The regulation affects seven specific commodities (cocoa, coffee, soy, palm oil, wood, rubber, and cattle) and their derivatives, as well as products made using these commodities (e.g., leather, cosmetics, chocolate etc.).  

The upcoming Regulation will necessitate that any company engaged in the import or export of these commodities from the EU substantiate that their products are free from deforestation. This requirement is applicable to all companies, irrespective of their EU-based status, and pertains to both legal and illegal sources of deforestation, whether within Europe or overseas. 

What does EUDR Compliance entail?

• The Regulation defines a product as deforestation-free when neither the product itself, its ingredients, nor its derivatives were generated on land undergoing deforestation or forest degradation after the cut-off date of December 31, 2020. This specific cut-off date has been proposed to minimize disruptions to international supply chains. 
• The term ‘Deforestation-free’ denotes that the respective products incorporate, were nourished with, or were crafted using relevant commodities originating from land that underwent no conversion from forest to agricultural use, whether human-induced or otherwise, post-December 31, 2020. Specifically for products containing or made with wood, it signifies that the wood was harvested from forests without causing forest degradation after December 31, 2020. ‘Forest degradation’ refers to the transformation of primary forests or naturally regenerating forests into plantation forests or other wooded land. 
• Crucially, and in contrast to prior EU regulations addressing illegal logging and associated trade (such as the EU Timber Regulation), the EUDR focuses on deforestation that complies with the laws of the country of production, even if it is legally sanctioned. The regulation references a report by the Forest Policy Trade and Finance Initiative, estimating that approximately 30% of deforestation for commercial agriculture in tropical countries between 2013 and 2019 was legally sanctioned. 
• Upon adoption by Member States, the enforcement of the Regulation, including inspections and sanctions, when necessary, falls under the jurisdiction of the respective authorities in each Member State. To assist Member States in this effort, an online system will be established to facilitate the exchange of information regarding products entering the EU market. 
• Companies seeking to import or export these products will be obliged to conduct thorough due diligence, whether independently or through expert third parties. 
• The EUDR mandates that products must adhere to the applicable legislation of the country of production regarding the legal status of the production area. This includes considerations for land use rights, environmental protection, forest-related regulations encompassing forest management and biodiversity conservation directly linked to wood harvesting, rights of third parties, labour rights, human rights safeguarded under international law, the principle of free, prior and informed consent (FPIC) as outlined in the UN Declaration on the Rights of Indigenous Peoples, and compliance with tax, anti-corruption, trade, and customs regulations. 

The 3 Step Due-Diligence Requirements 

• Data Collection 

To comply with the EUDR, companies must gather comprehensive data regarding the commodities or products they intend to sell. This data should encompass details such as the quantity, supplier, country of origin, and proof of legally compliant sourcing. Additionally, companies are obligated to acquire geographic coordinates pinpointing the specific land plots where these commodities are cultivated. These geolocation coordinates must be included in the due diligence statements submitted by operators prior to introducing their products to the Union market or exporting them. In essence, a due diligence statement, complete with traceability coordinates, must be filed before products can be made available in the market. 

• Risk Assessment 

The second phase entails conducting a comprehensive risk assessment based on the data gathered in the initial step. This assessment’s primary objective is to validate and appraise the likelihood of non-compliant products infiltrating the supply chain. 

• Risk Mitigation 

The last step necessitates businesses to actively address and mitigate any risks pinpointed during the second step. Subsequently, they must thoroughly document all measures and actions taken in this regard. 

• Risk Levels 

The actions to be taken following the benchmarking system are contingent on the risk level attributed to the sourcing country and the outcomes of the preceding steps. 

Step 1, securing trusted data, is obligatory and serves as the fundamental basis for subsequent steps. However, it also presents the most formidable challenge. 

Countries are categorized into three risk levels: low, standard, and high. If a country is classified as low risk, there is no need to undertake the risk assessment, which constitutes step 2. 

Completion of step 2, the risk assessment, without identifying evident risks obviates the necessity for step 3, risk mitigation, as there are no risks to address. 

Upon the regulation’s enforcement, all risk levels will be standardized, gradually assigning risk levels to each country over time. 

When does this Regulation kick-in? 

The regulation became effective for medium and large-sized companies on June 29, 2023, and the obligation will commence 18 months after this date, precisely on December 30, 2024. 

Any commodity produced and crossing the EU border following the legislation’s enforcement will be subjected to the regulation (both import and export). The 18-month moratorium for “activation” implies that, for instance, any cocoa harvested for the main crop in 2024 will fall under the regulation. 

For Small and Medium Enterprises (SMEs), the regulation’s obligation will begin 24 months after it became effective, indicating June 30, 2025. 

Effects of Non-Compliance 

Penalties for non-compliance will be established in accordance with national law. Eventually, the objective is for violations of the EUDR to result in criminal penalties. However, within the EUDR framework itself, penalties may include: 

1. Fines proportional to the environmental damage and the value of the items. These fines will incrementally escalate with repeated infringements, capped at a maximum of at least 4% of the entity’s EU turnover in the previous year, and may be increased to surpass the potential economic benefit. 

2. Confiscation of the products covered by the regulation or confiscation of the revenues obtained from these items. 

3. Temporary exclusion from participation in public procurement processes and the receipt of public funding. 

4. For severe or recurrent violations, temporary prohibition from engaging in transactions involving the EU in those items, or a prohibition from utilizing the simplified due diligence process. 

Solutions for EUDR Compliance 

Traceability solutions ensure transparency and compliance with EUDR regulations by providing accurate, real-time, and granular information about the origin and journey of products in the supply chain. 

Traceability solutions for EUDR compliance involve leveraging advanced technologies like blockchain technology and Satellite Imagery to trace, monitor and validate the entire journey of products throughout the supply chain.  

What TraceX can do? 

TraceX, with its blockchain traceability solutions, offers an advanced platform designed to assist businesses in navigating the intricacies of the EUDR. This next-generation solution enables companies to seamlessly comply with the EUDR’s due diligence requirements and streamline reporting on supply chain deforestation. 

What distinguishes TraceX is its comprehensive nature as an all-in-one platform. It is adaptable to various ESG compliance regulations and frameworks, extending beyond the EUDR. Utilizing field-based interventions and stakeholder engagement, TraceX facilitates direct action and communication at the source. 

TraceX captures real-time data directly from the field, consolidating information from diverse sources to provide a holistic view of each supply chain, regardless of complexity or the number of involved parties. The platform’s interoperability and scalability make it flexible to evolving business needs and compatible with third-party systems. Notably, its traceability granularity allows commodities to be directly linked to the specific plot of land of origin. An alert mechanism promptly notifies businesses of any forest encroachment activities in their sourcing areas, enabling swift and targeted action. 

• Digitalization from the First Mile: Initiating the digitalization process early on to acquire EUDR-compliant data. This involves utilizing technologies such as geographic polygon mapping to precisely determine the origin of products or raw materials. 
• Geographic Polygon Mapping: Utilizing this method to track the specific land areas from which raw materials are sourced. The goal is to ensure products and their supply chains are free from deforestation. This mapping can be conducted on-site using offline mobile applications. 
• Real-time Data Capture: Implementing systems for real-time data capture directly from the field. This includes consolidating information from various sources to provide a comprehensive view of each supply chain, regardless of complexity or the number of actors involved. 
• Granular Traceability: Offering granularity in traceability by directly linking commodities to the specific plot of land from which they originated. This level of detail allows businesses to make informed decisions about the environmental impact of their supply chains. 
• Visualization and Reporting: Simplifying the visualization of the entire product journey, from production to distribution. This involves identifying all actors and processes involved, centralizing crucial data for EUDR compliance, and presenting it in a dashboard format. This facilitates exploration of risk areas and the generation of detailed reports for auditing purposes. 

Conclusion 

In conclusion, navigating EUDR compliance is a complex yet imperative journey for businesses committed to ethical and sustainable sourcing practices. The adoption of advanced traceability solutions, such as geographic polygon mapping and real-time data capture, not only ensures adherence to EUDR regulations but also fosters transparency and accountability throughout the entire supply chain. The granularity of traceability, coupled with simplified visualization and reporting, empowers businesses to make informed decisions, identify risk areas, and demonstrate a commitment to combating deforestation. By embracing digitalization from the first mile and leveraging comprehensive traceability technologies, companies can confidently navigate the intricate landscape of EUDR compliance, contributing to a more sustainable and responsible future. 

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