On June 9, 2023, a new regulation was enacted that establishes the obligation for companies to demonstrate that products entering the European market have not contributed to deforestation and forest degradation. The new regulation is called EUDR – European Union Deforestation-Free Regulation.
The Regulation will directly impact the Brazilian agriculture market, as it will require the entire supply chain to demonstrate that the product to be sold in the European market does not come from deforested areas, which must be carried out through an environmental due diligence.
This regulation is part of the Green Deal in Europe and applies to all importers (operators) and traders, who will have to demonstrate and prove through audits that the products or byproducts sold do not originate from deforested areas or as a result of forest degradation, such provision came into force on 12.31.2020 (topic 46 of the preamble, topic 13 of article 1 and topic 3 of article 38). They must also prove that the production is not associated with the violation of human rights.
It is important to note that the Due Diligence requirement applies to the entire supply chain of the following products: coffee, soy, meat, cocoa, palm oil, leather, wood, rubber, and its byproducts (processed or semi-processed products), pursuant to Article 1 of the EUDR.
Thus, it will be necessary to develop technological tools to achieve full traceability for the entire supply chain, from the production site to the final product. In this regard, the Rural Environmental Registry (CAR) and MapBiomas will be two useful tools to demonstrate and evidence environmental compliance of the site where the commodities or their byproducts were produced.
In line with this regulation, it is important to note that companies will increasingly be required to ensure the traceability of their supply chains, as well as environmental compliance of the way in which the product was produced. In this case, there is an international movement for companies to seek environmental and sustainability certificates, and to effectively audit their suppliers to demonstrate that the raw material and the final product are not the result of deforestation or contributed to this practice, and to show that they comply with the applicable laws of the country of origin (Article 3).
There will be a risk assessment per country that will take into account the rate of deforestation or forest degradation, and the country can be classified as low, medium or high risk. On June 29, 2023, all countries were assigned a medium risk level, and the exact ranking of countries should be published by December 30, 2024, and is subject to revision and updating. Regarding Brazil, it is important to highlight that the country has an extensive forest area, most of which corresponds to the Amazon Forest, which, over the years, has attracted considerable attention and raised international debates about deforestation. In addition, other Brazilian biomes such as the Atlantic Forest, Pantanal and Cerrado are also considered areas of environmental protection.
Thus, the regulation is a way of putting pressure on the major players in the international market to implement environmental compliance audits, considering the entire supply chain and demanding a paradigm shift in third-party management. The regulation expands the company’s environmental and social responsibility, increasing the financial and reputational risk for all those involved in the production cycle of the products listed as targets for such regulation. Example: Normative SARB of Febraban No. 026/2023, which establishes guidelines for granting financial credits and risk management of illegal deforestation in the meat chain.
We envision a fundamental role for technology, in particular georeferencing, in supporting decision makers considering the risk analysis of their supply chain and in monitoring the information declared at the time of supplier approval.
The challenge is immense, as several tools available for analysis of the production site and suppliers are self-reporting and can lead to fraud or greenwashing. Controlling the entire supply chain, especially regarding indirect suppliers, is something that will require time and a high financial cost for the effective implementation of environmental audits.
Therefore, it is crucial to implement robust verification and audit systems, combined with transparency mechanisms, in order to ensure the credibility and integrity of environmental data related to suppliers.
The trend is for regulations like this to become increasingly common in international trade, as they allow working on four essential aspects of environmental law: combating illegal deforestation, restoring degraded forests, combating biodiversity loss, and reducing greenhouse gas emissions. However, verifying the effectiveness in the implementation and impact of a zero-deforestation goal in commodity producing countries is still a matter for further analysis.