European Council adopts new deforestation law

The European Council has given the final go-ahead to a regulation designed to minimise the risk of deforestation and forest degradation associated with products that are placed on or exported from the EU market. This news comes as environmental group ClientEarth has filed a legal complaint against US-based agricultural giant Cargill over its alleged failure to adequately deal with its contribution to soy-driven deforestation and human rights violations in Brazil. The EU is a large consumer and trader of commodities and products that play a substantial part in deforestation. The European Council said that the new rules aim to ensure the EU’s consumption and trade of these commodities and products do not contribute to deforestation and further degrade forest ecosystems. The regulation sets mandatory due diligence rules for all operators and traders who place, make available or export the following commodities from the EU market: palm oil, cattle, wood, coffee, cocoa, rubber and soy. The rules also apply to a number of derived products such as chocolate, furniture, printed paper and selected palm oil-based derivates. Operators will be required to trace the commodities they are selling back to the plot of land where they were produced. At the same time, the new rules aim to avoid duplication of obligations and reduce administrative burden for operators and authorities, said the European Council. There is also the possibility for small operators to rely on larger operators to prepare due diligence declarations, it added. The regulation sets a cut-off date for the new rules of 31 December 2020. This means that only products that have been produced on land that has not been subject to deforestation or forest degradation after 31 December 2020 will be allowed on the EU market or to be exported from the EU. The regulation creates a benchmarking system that assigns a level of risk related to deforestation and forest degradation to countries within and outside the EU. “The risk category will determine the level of specific obligations for operators and member states’ authorities to carry out inspections and controls. This will facilitate an enhanced monitoring for high-risk countries and simplified due diligence for low-risk countries,” said the European Council. “Competent authorities will have to carry out checks on 9% of operators and companies trading products from high-risk countries, 3% from standard-risk countries and 1% from low-risk countries, in order to verify that they effectively fulfil the obligations laid down in the regulation,” it added. Competent authorities will also carry out checks on 9% of the relevant commodities and products placed, made available on or exported from their market by high-risk countries. The EU said that it will enhance the cooperation with partner countries, in particular those classified as high risk. The new rules also take into account the protection of human rights related to deforestation. A reference was added to the principle of “free prior and informed consent” of indigenous peoples. The regulation includes provisions on penalties, which member states should ensure are “effective, proportionate and dissuasive”, said the European Council. “Fines proportionate to the environmental damage and the value of the relevant commodities or products concerned should be set at the level of at least 4% of the operators’ annual turnover in the EU and include a temporary exclusion from public procurement processes and from access to public funding,” it added. ClientEarth’s legal complaint against Cargill is brought over its alleged failure to adequately deal with its contribution to soy-driven deforestation and human rights violations in Brazil. The group said this complaint is the first time that Cargill, which is the largest privately held firm in the US, with annual revenue of $165bn, will be held accountable under international standards for its deforestation footprint in the Amazon rainforest, Atlantic Forest and Cerrado savanna. ClientEarth alleges that Cargill is not properly monitoring “vast quantities” of soy it trades, handles at its ports or ships to global markets. ClientEarth said this is despite a string of reports that document the company’s role in driving “environmental destruction” in Brazil’s vulnerable ecosystems, as well as rights violations of indigenous, Afro-Brazilian and other forest-dependent communities. ClientEarth has triggered the complaints procedure in the US under the guidelines of the Organisation for Economic Cooperation and Development (OECD), the international set of standards for responsible business conduct. Laura Dowley, ClientEarth lawyer, said: “The rapid expansion of soy production for animal feed worldwide is pushing Brazil’s vulnerable rainforests and savannas dangerously close to tipping points they may never recover from, while putting the communities that depend on them in danger. As one of the largest soy traders sourcing from Brazil, Cargill should be leading the world’s best practice to stop soy linked to deforestation and human rights abuses from flooding the global food market.” “Instead, its poor due diligence raises the risk that the meat sold in supermarkets across the world is raised on so-called ‘dirty’ soy. We believe this breaches the international code on responsible business conduct,” she added. ClientEarth said it has reviewed Cargill’s public policies and reporting documents, and claims they reveal deficiencies in its due diligence processes. Cargill argues that its policies include sophisticated monitoring, verification and reporting systems to end deforestation related to soy production in its supply chain. It has also made a commitment to being deforestation-free in the Amazon and Cerrado by 2025. But ClientEarth said Cargill does not appear to conduct: Proper environmental due diligence on soy bought from third-party traders, as opposed to directly from farmers, which makes up 42% of all Brazilian soy it purchases. Any environmental due diligence on soy owned by other companies that passes through its ports. Any environmental due diligence for indirect land use change. Proper environmental due diligence on soy sourced from the Cerrado savanna, despite the “massive” rate of deforestation there and the biome’s environmental importance. Any due diligence for soy sourced from the Brazilian Atlantic Forest – a global biodiversity hotspot and an important region for conservation. ClientEarth argues that Cargill should be conducting enhanced due diligence in all of the above circumstances given the scale of the risk and the company’s extensive resource as the largest private US company. Dowley added: “When you consider the huge resources Cargill has at its disposal and the critical state of the Amazon, Atlantic Forest and Cerrado, to not carry out deforestation checks on large parts of its extensive supply chain and soy operations is inexcusable. Cargill already has the know-how to do due diligence properly – it must start urgently putting it into practice.” The complaint also alleges that Cargill does not appear to have adequate policies and systems in place to address alleged human rights impacts related to its soy operations in Brazil, even though it has reportedly been linked to cases of rights violations. The Brazilian human rights organisation Terra de Direitos commented: “Defenders of human rights and traditional communities feel this every day. This complaint supports our struggle to end injustice against indigenous peoples, quilombola communities and other traditional peoples who struggle against the environmental destruction of their traditional territories as a result of industrial agriculture”. Commercial Risk and Global Risk Manager are to launch a dedicated information service covering Environmental, Social and Governance (ESG) issues, aimed primarily at large organisations in Europe. ESG Risk Review will provide insight and intelligence on sustainability risks, covering regulation, litigation and insurance market news, as well as analysis, comment, interviews and webinars. ESG Risk Review will be supported by Zurich as our headline partner and will offer free-to-access content for all risk and insurance managers and related ESG officials within corporates. It will launch on 17 May 2023. To sign up for the monthly newsletter, please visit: https://www.commercialriskonline.com/esg-launch/

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