EU’s new law puts industry in spotlight on deforestation

Aerial view of deforestation. Rainforest being removed to make way for palm oil and rubber plantations.

News the EU is banning products linked to deforestation has been welcomed by those campaigning on sustainability and climate change issues but what impact will the move have on food manufacturers and their supply chains?

The EU’s legislative body – the European Parliament – adopted the new law in April. It means companies will only be allowed to sell products in the EU if the supplier of the underlying ingredients has issued a so-called due diligence statement confirming their commodities do not come from deforested land or have led to forest degradation since 31 December 2020.

In food, the new law covers beef, cocoa beans, soya beans and palm oil.

Large companies have 18 months to comply with the rules with smaller businesses getting an extra six months.

The introduction of such legislation raises a number of questions.

Firstly, is it necessary given sustainability certification already exists and many companies build deforestation compliance into their own ESG strategies?

Secondly, could the law of unforeseen consequences come into play with the additional cost of compliance and traceability punishing small farmers at the top of the supply chain?

And, thirdly, will those additional costs be passed on to consumers in Europe?

Countries, or areas of them, will be classified based on an “objective and transparent assessment”.

EU authorities will have access to relevant information provided by companies, such as geolocation coordinates, and will conduct checks with the help of satellite monitoring tools and DNA analysis to check where the source of the commodities.

Penalties for non-compliance with the new deforestation rules will be “proportionate and dissuasive” and the maximum fine will be at least 4% of the total annual turnover in the EU.

“The EU law should drive more action from big banks and brands to end deforestation, forest degradation, and the conversion of natural ecosystems in their supply chains or investment portfolios - an absolute necessity if we are to avert catastrophic climate change,” argues Emma Rae Lierley, a spokesperson for San Francisco-based environmental organisation Rainforest Action Network (RAN).

“The law is poised to drive rapid reforms in the supply chains most responsible for deforestation – especially beef, soy, palm oil, pulp and paper, and coffee – as producers of these commodities will be subject to additional due diligence. Companies failing to align their practices with the leading global standard of No Deforestation, No Peatland and No Exploitation (NDPE) should be most impacted.”

Lierley suggests the provisions in the new law that call for geo-location data “will drive much-needed pressure to achieve traceability in supply chains”.

She adds a recent investigation by RAN “found that palm oil produced illegally on protected carbon-dense peat forests was entering global supply chains because companies were not tracing it back to the farm level”.

Manufacturers claim to be making strides in their efforts to tackle deforestation.

Nestle tells Just Food that “achieving deforestation-free supply chains is key to our efforts to achieve net zero”.

It adds: “To date, we have made strong progress: at the end of 2022, more than 99% of the aggregate volumes of key commodities we sourced were assessed as deforestation-free.”

Likewise, at the end of last year, chocolate major Ferrero said in its first annual Cocoa Progress Report that it has made a “significant step towards full traceability of its cocoa supply chain”.

It added: “Ninety-six per cent of our cocoa is traceable to farm level via GPS – 88% via Polygon mapping – which allows us to meet the needs of our farmers in a targeted way.”

The Kinder Bueno brand owner said 100% of its cocoa is sourced through certification and independently-managed sustainability standards such as Rainforest Alliance, Cocoa Horizon, Fairtrade or others.

However, Lierley says big companies working with these commodities need to do more. She points to a yearly scorecard RAN publishes on the NDPE policies of major consumer goods companies and banks. The most recent scorecard analysed companies including Nestlé and Ferrero. Nestlé received praise for publishing preliminary data on what RAN called its “forest footprint”. Ferrero had made some improvements in its disclosures, RAN’s report read, but all 17 businesses featured in the report still faced criticism.

Lierley adds: “RAN’s annual scorecard, released most recently in June 2022, evaluates progress by some of the world’s most influential brands and banks on their adoption and implementation of NDPE policies. Alarmingly, none of the 17 brands and banks have taken adequate action to address their role in deforestation and human rights abuses and, currently, all will fail when measured against the EU legislation requirements.”

The Paris-based Consumer Goods Forum (CGF), which has some 400+ consumer goods companies – including food businesses such as Nestlé, Unilever and Danone – among its members, campaigns on deforestation through its Forest Positive Coalition.

The coalition was launched in 2020 after the CGF and its members failed to hit a goal to achieve “net deforestation” by 2020.

Didier Bergeret, the CGF’s director for sustainability, says: “We have been working on Forest Positive for some years so any legislation that supports that is always good to have.

“Big companies are doing a lot of this stuff already but the challenges in deforestation are multi-faceted.

“It [the new law] has a short implementation time so it’s ambitious.”

The CGF says its Forest Positive initiative encompasses “five basic areas of action”, including for members to be “deforestation and conversion-free across entire commodity business” with a “public time-bound action plan with clear milestones”. Mechanisms to engage with suppliers and to report non-compliance are built into the plans.

But Bergeret sees the difference legislation can make compared to such initiatives. “[The danger is] it ends up deliverable as another reporting requirement so they can fall short sometimes,” he says.

Some argue certain commodities are better covered by existing certification than others.

“Palm oil is covered by regulations and voluntary standards and has had a lot of scrutiny,” Bergeret says.

Harry Smit, a senior analyst in the farm inputs team at Netherlands-based financial services group Rabobank, agrees with this reading of the situation.

“In some sectors there is already some certification, such as the Roundtable on Responsible Palm Oil. Sectors like that will feel less impact as these certifications are pretty well used for European imports,” he says.

“Relatively small volumes of beef is imported from outside Europe. Large slaughterhouses can provide proof of where the animal has come from and they are already doing that because of food safety issues linked to things such as foot and mouth. Whereas with cocoa beans it is all imported.”

Like Bergeret, Smit believes the 18-month implementation target is “quite ambitious to have full tracing capabilities”.

He suggests some manufacturers may review where they source certain inputs.

“A lot of soya beans come from Brazil where there is deforestation. There could be a switch to the US,” Smit says. 

There are concerns the EU’s legislation may stigmatise countries by labelling them as risky sources of produce. Meanwhile, there is a worry the cost of implementing track-and-trace measures could fall to the small suppliers at the end of the chain who can ill afford the expense. 

The new law has attracted criticism from Malaysia, one of the world’s largest producers of palm oil.

“The regulation is a deliberate attempt to increase costs and barriers for Malaysia’s palm-oil sector,” Malaysia’s Deputy Prime Minister Datuk Seri Fadillah Yusuf said in the wake of the legislation being passed.

He argued designating Malaysia as a high-risk country is “unjustified” and added: “Malaysia has made, and kept, world-leading commitments to forest conservation and sustainable agriculture.”

Bergeret at the CGF has some sympathy. “They [Malaysia] want to be recognised for their efforts they have been leading. This is just fair as efforts should be recognised. Risk classification is not always a good starting point in a relationship. It could be counter-productive.”

There is concern too about whether the impact the legislation will have on small farmers could also be counter-productive.

Bergeret says: “You can design all the roadmaps you like but if you don’t involve smallholders you will never get to a solution.”

Smit at Rabobank adds: “It will be easier to implement for big producers whereas the cost for smaller farms will be higher. Proving the proof of origin will add to the costs.”

Lierley at RAN, speaking about the palm oil industry, argues farmers will need backing but believes they could feel the benefit of the new policy.

“Smallholder farmers will need support from all levels of government in importing and exporting countries and companies throughout the palm oil value chain to make this work. Import country governments and the private sector must rapidly scale up investment for smallholders to meet global NDPE standards and resources to participate in the EU due diligence systems,” she explains. 

“The new EU law could provide a positive opportunity for smallholders to help shape policy to support their livelihoods and reduce deforestation. In recognition of this, some smallholder organisations have shown support for the EU law.”

Thijs Geijer, a senior analyst covering the food and agriculture sector at Dutch bank ING, believes a lot will come down to the actions of the middlemen, the traders sitting in the supply chain between the cooperatives and smallholders at one end and the food manufacturers at the other.

“I think the first thing for food companies who get product from large traders is to enter into discussion with those traders and ask them whether they can guarantee that it is 100% deforestation free,” he says.

“But the pressure is on the middlemen. The traders will put pressure on the cooperatives or farmers so there is a distinction between [say] cocoa with many small farmers and soy with large agricultural companies.

“But companies in the EU are dependent on these commodities so there is a need to ensure farmers are included in the system.

“There could be a shift towards direct suppliers where there is more visibility.”

There is also the question of whether increased costs in the supply chain for implementing these measures could end up being passed on to consumers.

“In the small, fragmented farming sector it is more difficult [to implement] and could be prohibitively expensive. It come mean products are more expensive from smaller farmers because it is an inefficient supply chain,” Smit says.

“There will be additional cost because of traceability so it will raise prices in Europe to some degree. In the end the costs have to be passed on to the consumer.”

Of course there are already ethical providers in some of these product areas and their experience could prove a useful guide for the companies now being forced to follow in their footsteps.

One is Netherlands-based confectioner Tony’s Chocolonely.

Pavithra Ram, who holds the job title of impact navigator at Tony’s Chocolonely, says: “At Tony’s, we’ve had a fully traceable supply chain since 2012, which allows us to track all cocoa from bean to bar. It’s the foundation needed to take responsibility for the conditions under which our cocoa is produced and we hope regulations like this will inspire chocolatiers to act and do things in a better way.”

On dealing with suppliers, Ram adds: “We work together to professionalise farming cooperatives and farms, giving farmers more power to structurally change inequality and become more profitable. If we do find incidents, instead of stopping our work with that farmer, we work together on remediating the situation and improving circumstances because we know that punishment won’t solve the issue. We believe this is the way to have true impact and change the norm of the cocoa industry.”

However, in regard to the EU’s legislation, Ram says it is unclear what the impact could be on smallholders.

“We believe that small farmers in producing countries will need the support of larger companies and the EU in order to make sure they do not bear all the compliance costs. However, any need for additional support to meet the requirements of this regulation will only be assessed five years after the entry into force,” she says.

Also concentrating on small farmers at the end of the supply chain is Unilever.

The Ben & Jerry’s owner has just announced that, in the case of palm oil, which it uses in many of its food, home and personal care products, it is now sourcing directly from producers on the ground. The company says it is an initiative that pre-dates the passing of the new EU legislation.

“This not only benefits the local environment, it’s also a win for smallholders, independent mills and our own supply chains,” Unilever says in a statement.

The Marmite maker argues the initiative “allows us to get closer to the origin of our materials and improve the livelihoods of the people we are working with, while increasing the availability of traceable and deforestation-free palm oil”.

It adds: “Ultimately, our direct sourcing strategy will not only ensure Unilever has a traceable and deforestation-free palm supply chain but will also help to increase the amount of certified sustainable and verified deforestation-free palm oil within the industry as a whole.”

There’s little question the problem of deforestation is multi-faceted and will take concerted action by the public and private sectors. But, in a further sign of the growing importance being placed on the subject, at the start of June, Brazil’s government set out how it plans to meet its pledge to end deforestation in the Amazon by 2030. The world will be watching its efforts – and those of the international food industry – closely.