The deforestation regulation clock is ticking for food and drink

In a way, deeming it a political issue has allowed the food and agriculture industry, which is behind over 90% of deforestation, to carry on unscathed. But that lack of accountability is coming to an end, as both the EU and the UK are gearing up for unprecedented regulation to stop deforestation linked to food production. The countdown is certainly on – but how exactly will each piece of legislation affect the fmcg trade? And how prepared are businesses?

Perhaps most pressing – and certainly most prescriptive – is the EU’s deforestation regulation (EUDR), officially passed in June last year in what many deemed the biggest shake-up to food and drink supply chains since the industrial revolution. Under the EUDR, which comes in from 30 December this year, businesses bringing commodities including cattle, soy, palm oil, cocoa and coffee into or out of the EU, must be able to trace their products all the way to farm level and prove their supply chains are not linked to illegal deforestation, biodiversity loss, and labour and human rights abuse.

Those who do not comply can have their shipments blocked or their products confiscated, and be denied access to the EU market. More importantly, they can be fined up to 4% of their annual turnover in the EU.

The EU Commission brought in the regulation in a scheduled way, allowing an 18-month implementation period for larger firms and a 24-month period for SMEs, so it could “iron out any of the issues the big guys are facing”, according to Anna Doherty, senior trade and customs specialist at the Institute of exports and International Trade (IOE&IT). The stakes are high not just financially but also reputationally, she says. “With ESG measures being so high on the agenda of consumers, you can’t afford the reputational damage of being involved in this sort of scandal.”

The impact on UK businesses is clear. With the bloc being Britain’s closest trading partner, it’s inevitable a huge share of fmcg businesses will find themselves in scope of the EUDR’s tough rules. Yet a fifth of UK businesses are still not prepared, according to a recent survey by Foods Connected. Around 30% of companies have not invested in new data-tracking technologies and still depend on paper trails, notes the supply chain software specialist’s head of business traceability innovation Stephanie Brooks. “This is going to cause issues when they are expected to perform spot checks by EUDR officials,” Brooks warns.

UK divergence

This side of the Channel, regulatory efforts are less solidified. The government announced in December it would roll out new requirements on forest-risk commodities in an amendment to the Environment Act.

importers with at least £50m in global turnover who trade more than 500 tonnes of the regulated commodities – including beef, leather, soy, palm oil and cocoa – will need to produce an annual declaration showing their imports did not come from illegally deforested lands. Companies who break the law face “unlimited variable monetary penalties”, Defra said. However, it is unlikely industry will get more detail before the bill’s second reading “when parliamentary time allows”.

In many aspects, the EU and UK anti-deforestation efforts merge in that they both attempt to reach full supply chain transparency. But it is where they diverge that is causing industry some headaches.

For one, the UK’s proposal is not nearly as specific as the EU’s, Doherty points out – like how the latter specifies commodity codes in scope, but the former doesn’t. The UK’s are also far less rigid, asking businesses to “reduce the risk to as low as reasonably practicable”. “But what is reasonably practicable for me may be different for you, so there is no clear criteria,” Doherty says.

Without that specificity, it’s difficult to “understand what impact the legislation is going to have” over voluntary commitments like the UK Soy Manifesto, which most of the big retailers and food companies are signed up to, argues Gemma Hoskins, UK senior director at non-profit Mighty Earth. British retailers have been “pushing hard” for suppliers like Cargill and Bungee to up their traceability game, she says. But without actual regulation, it will be “very challenging”.

The UK’s Environment Act amendment has also left out coffee and rubber, despite the UN considering both forest-risk commodities. Analysis by Trase showed UK coffee was responsible for forest loss equivalent to about four times the size of Glastonbury Festival between November 2021 and July 2023. Many have pointed out the UK risks becoming a dumping ground for goods that were deemed not good enough for the EU.

The UK’s own Environmental Audit Committee (EAC) has told the government to opt for a ‘zero-deforestation’ approach by prohibiting UK businesses from trading in commodities linked to UN-defined deforestation in all cases, regardless of whether the deforestation was illegal or permitted by local laws. This would encourage consistency in trading such commodities across UK and European markets, the EAC argued. The government rejected the recommendations, saying it believed global partnership meant “upholding and respecting national laws”.

But Doherty notes there is still scope for Britain to review the practical implementations of its own laws – especially because, under the UK and EU Trade Co-operation Agreement, “we cannot diverge too far away from EU regulations”.

Without that alignment, ministers will face a nightmarish Brexit deja vu in the form of Northern Ireland trade. Under the Windsor Framework deal between London and Brussels, Northern Ireland enjoys minimal trade barriers with both the rest of the UK and the EU single market in order to avoid both a land and Irish Sea border.

“No one is arguing against the regulations. It’s the fact there are still so many questions left unanswered”

Anna Doherty, IOE&IT

But this raises concerns that UK goods that don’t comply with EU regulations, and vice versa – for instance, embedded soy used in chicken and beef production which faces stricter red tape in the UK – may travel between the two markets without verification.

“We just don’t have that level of detail yet in terms of how Northern Ireland is going to be treated, so it’s difficult to predict what’s happening there,” says Hoskins. “But we know it’s caused a lot of headaches.”

‘It’s not going to be pretty’

Fully changing the way well-established supply chains work always comes with downsides. The EUDR’s strict requirements could potentially threaten many smallholders’ livelihoods, as they fear they will be locked out of crucial markets if they aren’t able to produce the evidence required by their European buyers. Commodity supply chains rely on thousands of small farmers in rural communities who are often dependent on paper trails to keep track of their sales and have no access to the type of technology and data-tracking resources that a law like EUDR demands.

“It’s not going to be pretty for those farmers,” says Rabobank’s head of commodity research Carlos Mera. “Inside communities you have intermediaries, and they’ll be used to mixing coffee and cocoa from many different farmers – some may be compliant, some may not. So that requires segregation of the supply chain.”

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This also means it’s likely volumes of non-compliant goods will simply be shipped to other markets where demand is increasing and sustainability is not necessarily a priority – say China, India or the US. But this type of market segregation should be very concerning for European buyers, because it’s resulting in “traders threatening eye-watering cost increases of 40%-50% on base prices” for EU and UK retailers, says Hoskins.

The EU Commission already estimates recurrent annual due diligence costs for importers could range from €175m to €2.6bn. The costs associated with all this red tape will inevitably trickle down the supply chain to the consumers’ end, Mera warns: “There will be an EUDR compliance premium.”

Many businesses have also been rushing to build up stocks of the affected commodities (see box, above) ahead of the 30 December deadline, he says, which is putting further pressure on prices at a time when cocoa and coffee are already at record highs. Mera concedes that “it’s going to be tricky for consumers”.

Unanswered questions

The EUDR has predictably faced a lot of backlash. Many member states have been vocal about the European Commission’s inability to address concerns – mainly around the information system where companies will register their due diligence documents. The platform began being trialled around the start of the year, but rumours claim it’s nowhere near ready.

Meanwhile, work is underway in producer countries to set up national traceability systems to support their farmers – for example, in the Côte d’Ivoire, where all plots of land will be geolocated and producers will be registered under one system. But there are fears these won’t be ready in time for the December deadline.

Similar efforts have been made by companies such as Nestlé, which is currently setting up processes for EUDR compliance by using a combination of tools such as supply chain mapping, satellite monitoring and on-the-ground verification, as well as third-party certification. A spokesperson claims Nestlé is “well placed to meet the new EU requirements”. Nevertheless, “further clarity is needed on a few remaining practical aspects”.

This includes clarity over the most talked-about aspect of the bill: the country risk classification system. It will assess if a low, standard or high risk of deforestation is present in the country of origin, which will ultimately determine the admin costs and risk exposure of companies. The Commission was supposed to have appointed a consultant to complete an initial benchmarking assessment in June 2023, but it still hasn’t.

As it stands, all countries will be treated as standard. Once the regulation goes live, they could be placed into low or high-risk categories. But this would “add to the frustration” if countries eventually classified as low risk still need to make those initial investments, only to then be told “that wasn’t really needed”, Doherty says.

Ultimately, all countries just “need the Commission to do their homework and get this stuff in place”, argues Julian Oram, Mighty Earth’s senior director in Africa. He adds that EU Commission president Ursula von der Leyen “getting spooked recently by the farm lobby in Europe to row back on various types of green legislation is starting to put pressure on this regulation as well”.

“There are a lot of countries going: ‘Once we’re on a regulatory path, we just want clarity about what the timetable is and what we need to put in place.’ These kinds of mixed signals are really disruptive and unhelpful for industry,” Oram says.

The same is being asked of the UK government: clear criteria over ambiguous language that could result in companies being unfairly penalised. And, where alignment with EUDR is possible, for businesses to be given enough time to prepare.

“Deforestation is a massive piece of the sustainability jigsaw, so there’s huge buy-in from industry,” Doherty says. “No one’s arguing against the regulations. It’s just the fact there are still so many questions left unanswered.”