2023-05-12 00:25:00 ET
Summary
- New regulation aiming to curb deforestation and land degradation from commodity production could have significant consequences for companies and investors.
- Agricultural production has put forests, vital to human survival, under severe threat of deforestation and degradation.
- To address this, on April 19, the European Parliament voted in favor of the EU’s landmark Deforestation Regulation, which prohibits commodities produced on deforested or degraded land.
By Argi Sampedro
New regulation aiming to curb deforestation and land degradation from commodity production could have significant consequences for companies and investors.
Agricultural production has put forests, vital to human survival, under severe threat of deforestation and degradation. To address this, on April 19, the European Parliament voted in favor of the EU’s landmark Deforestation Regulation, which prohibits commodities produced on deforested or degraded land - including cattle, cocoa, coffee, palm oil, rubber, soya and wood - from being sold into the bloc. The new rules also cover products made using those commodities (e.g. leather, chocolate and printed paper).
The regulation will require affected EU importers and exporters to issue a “due diligence” statement, including information such as the quantity and geolocation of production land, since the start of 2021. EU policymakers expect that, beginning in 2030, the initiative could save more than 71,920 hectares of forest and 32 million tonnes of carbon dioxide every year. 1
That progress will come at a cost, however: The annual tab for reporting, ensuring traceability and reorganising global supply chains could run to €175m-2.6bn per company, and penalties for non-adherence - including confiscation of goods and exclusion of public procurement and funding - are expected to be more than 4% of annual turnover. 2
New requirements will be applicable 18 months after the regulation’s publication, meaning that companies will have until late 2024 or early 2025 to prepare for implementation. For now, the European Commission will publish a list, classifying countries as low, standard, or high risk, which will determine the level of due diligence required.
The regulation’s success, in our view, will depend on each EU Member State enforcing the requirements. In addition, we expect NGOs to continue their push to bring other ecosystems - including wetlands, peatlands or savannahs - into the regulation’s scope; similarly, we believe certain organizations and political parties will continue to encourage the financial services industry, including asset managers, to follow suit.
In the meantime, we expect the investment management industry will work towards complying with the new regulation by developing sufficient information gathering and risk management systems to properly assess its exposure to deforestation risk.
Source: (1) European Commission proposal on Deforestation ; (2) European Commission
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The EU Takes Action Against Deforestation