Deforestation is one of the key factors in climate change and biodiversity loss that is complex to solve and requires a diversity of policy mechanisms. Without halting and reversing deforestation by 2025, climate and biodiversity targets set out in the Paris Agreement and the new Kunming-Montreal Global Biodiversity Framework will not be reached. Recent assessments indicate that deforestation rates have declined globally[1]. However, the pace of this reduction is insufficient to halt deforestation in time. Worryingly, the reduction in deforestation rates has been even less significant for primary forests in humid tropics that harbour immense biodiversity and are crucial for the local, regional, and global climate. Agricultural land use change is the key direct driver of deforestation. In recent years, we have seen an increase in global awareness and public and private action towards eliminating agriculture-driven deforestation, accompanied by a significant shift from voluntary to mandatory actions in major consuming countries.
EU regulation on deforestation-free supply chains – raising the bar of sustainable trade policies
The most ambitious regulatory innovation comes from the European Union. CDP welcomes the final version of the EU regulation on deforestation-free supply chains that is expected to enter into force mid-2023, with the central obligations for companies to enter into application 18 months afterwards. The inclusion of rubber, a strengthened definition of forest degradation, solid control quotas, improvements for the protection of human rights and the consideration of smallholder needs, have improved the initial proposal by the European Commission (EC). Most importantly, the final version contains review clauses to consider the inclusion of other natural ecosystems, such as savannahs, into the policy. The text also requires the EC to assess the necessity to develop additional regulatory obligations for financial institutions in combatting deforestation. These review clauses are crucial to avoid increased pressure on non-forest ecosystems and to ensure thorough sustainability due diligence requirements for financial institutions, currently lacking in the Corporate Sustainability Due Diligence Directive (CSDDD).
EU regulation on deforestation-free supply chains – a policy innovation with global impacts
CDP expects that the regulation will significantly contribute to improved corporate traceability capabilities globally, especially across their indirect supply chains. It is likely that the largest share of agricultural imports into the EU is not connected to deforestation that occurred after the cut-off date of 31st December 2020. However, it can be assumed that companies are currently unable to prove that such flows are technically compliant with the regulatory requirements. CDP’s 2021 Forests data provides an indication that most companies have significant gaps in supply chain traceability. The global data set, in which European companies have the highest representation, shows that only 23% of reporting companies can trace more than 90% of the volumes they produce or source to the municipality level or equivalent for least one commodity[1]. Companies will, therefore, need to improve their traceability systems, potentially contributing to enhanced transparency in complex supply chains beyond the EU.
CDP anticipates that the inclusion of rubber into the EU regulation stimulates a needed sustainability transformation in the rubber sector globally. CDP Forests data shows that the rubber sector exhibits comparatively weaker performance in managing the risks of deforestation associated with the production and consumption of rubber. In comparison to other forest-risk commodities, such as palm oil or timber, it exhibits the worst performance in conducting forest-risk assessments, implementing traceability systems, and engaging with direct and indirect suppliers. In the context of the EU regulation, these aspects need to be improved, likely also impacting supply chains destined for non-EU markets.
CDP foresees the potential amplification of segregated global agricultural supply chains. In many cases, Europe is already the biggest buyer market for sustainable agriculture commodities. For example, the lion's share of certified palm oil is exported to the EU. The upcoming EU regulatory requirements will create a level playing field and ensure that only compliant commodities and derived products enter the EU market. To ensure complete legislative compliance, agricultural commodity traders will revert to different strategies. A central strategy will be the restructuring of their supply chains. This can include replacing non-compliant suppliers, as well as suppliers with higher risk-exposure to deforestation with compliant and less risk-exposed ones. In addition, EU-sourcing channels might be diverted from regions with high deforestation risk exposure. Ultimately, these non-compliant volumes will be channelled to domestic or external markets with less stringent regulations and weaker incentive structures for sustainable production (eg immature markets for certification). This could potentially complicate the needed acceleration of sustainably transforming the agricultural sector.
Overall, the EU regulation on deforestation-free supply chains is a significant step forward in the global fight against agriculture-driven deforestation. Nevertheless, further action is needed from policymakers and businesses across the globe to halt and reverse deforestation by 2025.
CDP recommends policymakers to:
- Ensure alignment of emerging US & UK due diligence requirements with the more comprehensive EU approach
- Enable cooperation and provide strong support mechanisms
- Innovate policies in China, India and Japan
The EU policy is, compared to legislative developments in the US and UK, more comprehensive and should inspire further legislative improvements in these jurisdictions to facilitate a level-playing field. In 2021, the UK adopted the Environment Act[2], including a legislative requirement to end deforestation associated with the import of agricultural commodities. A public consultation for the secondary legislation that will provide the relevant, but still unknown policy details has concluded. In the US, the Forest Act[3] has been introduced into the Senate in 2021, experiencing insufficient political support. The EU and UK policy developments, as well as President Biden’s executive order from 2022 that requires the development of a report on whole-of-government approaches to agricultural-driven deforestation[4], will likely bring new life to the Forest Act. In comparison with the UK and US policy versions, the EU policy is more comprehensive. To ensure a level playing field and avoid leakage effects, the UK and US policy discussions should be further inspired by the EU policy development. For instance, the US and UK could consider a strong definition of forest degradation, and the prohibition of any type of deforestation, legal or illegal, to ensure halting deforestation and forest degradation by 2025. The UK policy could reconsider its exclusive focus on forest ecosystems, considering also other wooded land. Also, both the UK and US could consider adopting the EU regulatory requirements on protecting human rights and taking into account the needs of smallholders.
Future engagement with and support for major agricultural producing countries is necessary, but not sufficient. The EU regulation contains strengthened language on cooperation activities with producing countries. CDP strongly welcomes that the Commission shall be required to develop a comprehensive EU strategic framework for such partnerships. However, strategic cooperation demands time and the financial resources of the EU for such cooperation activities is likely a constraint. It remains to be seen how the US and the UK will attach public support measures to their corporate due diligence legislations. While the US Forest Act contains paragraphs for a limited cooperation with producer countries, the UK Environment Act has currently no specific provisions for international cooperation at all. It is paramount to combine the EU, US and UK due diligence legislations with comprehensive support mechanisms, equip those with substantial financial resources, and ensure that the design and implementation of such support measures is done collaboratively together with producing countries.
Without policy innovations in China, India and Japan, the global commitments to halt and reverse deforestation will not be achieved. According to a WWF study from 2021, these three countries alone accounted for 38% of deforestation associated with international trade[5]. China and India have also experienced an increase in the deforestation embodied in their imports[6]. China has revised its Forestry Law in 2020, requiring companies to trace their timber to a legal source. Chinese industrial and business groups are working with international organizations on producing voluntary guidelines for sustainable procurement and consumption of agricultural commodities, such as for palm oil or rubber. Although there is not yet a specific Chinese policy framework to remove deforestation from soft commodity supply chains, there are increasing signs that China is looking into addressing this issue within its supply chains and operations. In Japan and India, there are also signs for future policy innovations. Inspired for example by the EU Timber Regulation and the US Lacey Act, Japan enacted in 2016 the Clean Wood Act to combat illegal logging and associated trade. In February 2023, revisions were made to the Clean Wood Act, making it mandatory for companies to assess legality of wood and wood products[7]. It is likely that the ongoing policy innovations in the US, EU and UK will facilitate further conversations on expanding the scope of the Clean Wood Act. Already in 2018, Japan’s Forestry Agency organized an international symposium to promote deforestation-free supply chains. In India, there are ongoing bilateral engagements between EU governments and India on this issue.
The role of CDP: preparing market participants and facilitating communication of corporate action
The use of CDP’s Forests Questionnaire is crucial to prepare businesses for future policy innovations in China, India, and Japan, as well as to facilitate communication with customers and investors in the US, UK, and EU markets. Achieving global climate and biodiversity targets will become ever more pressing as the world increasingly faces the negative consequences of unsustainable economic activities. Forest protection is central to achieving these targets. Therefore, companies need to expect policy innovations beyond the EU, US, and UK. To reduce these transition risks for companies in countries such as China, India, and Japan, CDP’s Forests Questionnaire provides a framework of action for companies to measure and manage forest-related risks and opportunities, enabling companies to remove deforestation from their supply chains. Within the EU, US, and UK, even after the introduction of the policies, it will be crucial for companies to provide relevant information to external stakeholder, such as investors or customers. CDP’s forests questionnaire allows companies to transparently report on progress. Also, it enables companies to stay ahead of future policy revisions and can stimulate companies to commit to proactive action for the restoration of forests and ecosystems to ensure a nature-positive world.
[1] CDP_AFI_Forest_Report_2022_(14).pdf
[3] Text - S.2950 - 117th Congress (2021-2022): FOREST Act of 2021 | Congress.gov | Library of Congress
[4] FACT SHEET: President Biden Signs Executive Order to Strengthen America's Forests, Boost Wildfire Resilience, and Combat Global Deforestation | The White House
[5] stepping_up___the_continuing_impact_of_eu_consumption_on_nature_worldwide_fullreport_low_res.pdf (panda.org)