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EU due diligence – the time has come

Companies have long been promising they will eliminate deforestation from their supply chains. But as the latest Forest 500 report finds, voluntary progress has failed. Now is the time for governments to ramp up their efforts to address tropical deforestation, by introducing strong regulations.

The European Union (EU) currently has no legislation to ensure that companies source deforestation-free agricultural commodities. But the EU’s recent Action Plan on forests opens the door for a new law. Under mounting NGO pressure, corporate demands to ‘level the playing field’, and with the European Parliament’s call for an EU framework for due diligence, EU-wide due diligence regulation could be tabled next year.

By introducing due diligence legislation, the EU could speed up companies’ transitions to deforestation-free supply chains. But what is due diligence? And what insight can Forest 500 bring to the discussions?

What is due diligence?

Due diligence is a legal term which refers to a business or person exercising a reasonable amount of care to avoid committing harm or offence before entering into agreement with another party or performing an action.

Applied at the EU level, due diligence legislation would mandate companies operating in the EU to assess, prevent and mitigate the environmental, social and governance risks and impacts of their supply chains, including the risk of deforestation, on an ongoing basis.

It would require companies to operate fully transparent supply chains, in order to identify risks and monitor any negative impacts on the environment and human rights from their sourcing. Companies would be held responsible for remedying and addressing any environmental destruction associated with the production, processing and/or trade of the products they purchase and sell.

The devil is in the detail

To be effective, due diligence legislation will need to include clear definitions and guidance on risks, a wide scope of products and companies, and a clear reporting framework. And this will in turn need to be backed up by strong enforcement. The 2019 Forest 500 report highlights three reasons why a strong due diligence regulation is critical for addressing deforestation.

1. Mandatory action  

According to Forest 500 lead researcher Sarah Rogerson, “Companies left to their own devices don’t do enough to address tropical deforestation. Due diligence could push them over the line.”

The 2019 Forest 500 annual report flags how even the most influential companies with exposure to deforestation that operate within the EU still cannot be relied upon to make voluntary commitments.

Our assessment found that 19% of the 186 Forest 500 companies operating within the EU had no deforestation commitment for any commodity.  

These companies include Groupe Lactalis, Europe’s number one cheese manufacturer which owns dairy and cheese brands including President; Capri Holdings, owner of luxury brands Versace, Jimmy Choo and Michael Kors; and Dutch supermarket chain Spar.

Due diligence legislation would force these companies to identify and address deforestation risks for their operations in the EU market. Given that many of the EU-operating companies are global, EU legislation could potentially galvanize these companies to apply their improved sustainability practices – such as greater transparency – to other geographies.

2. Mandatory reporting 

Currently companies can make claims about their deforestation commitments, without publishing reports on how these are being fulfilled. Regulation would require companies to report on how they are implementing their due diligence policies.

The 2019 Forest 500 report found that of the 150 EU-operating companies with deforestation commitments, 28 are not reporting on how (or whether) these commitments are being met.  

Setting strong commitments is only the first step towards removing deforestation from a supply chain. Companies must also transparently report on how they are implementing commitments. For example, they could report on their monitoring systems.

Companies failing to report on their implementation may be hiding behind convincing but hollow commitments.

For example, the Forest 500 report found that clothes retailer H&M had a strong commitment score (74%) but a very weak reporting and implementation score (15%). With strong due diligence legislation in place, this gap should shrink, and companies will face greater scrutiny on how they are addressing deforestation in their supply chains beyond introducing policies.

3. Standardised reporting

“At the moment companies choose what they report, and how much detail they provide. This makes it difficult to measure the extent that companies’ deforestation commitments are being fulfilled”, explains Rogerson.

To be successful, any EU due diligence regulation would need to introduce an obligatory, uniform reporting structure that goes beyond comply or explain. This would ensure that enforcement agencies and third parties could undertake a clear assessment of whether or not companies are making progress, because reports could be easily cross-referenced and analysed.

Impact

EU due diligence could have a global impact. Europe is one of the foremost consumer regions of forest-risk commodities, importing a third of the products associated with deforestation. A recent study found the EU has the highest imported deforestation risk of any region. Introducing legislation would be a bold example of Europe showing global leadership and could raise the global bar for company behaviour.

graph shows deforestation embodied in consumption for different countries
Fig.1. Deforestation in consumption (Pendril et al., 2019)

EU due diligence could also increase international supply chain transparency. If consumer-facing companies in Europe have to track their supplies, suppliers would be put under market pressure to share more information about their sourcing practices.

Limitations

Yet legislation in Europe alone will not be sufficient to end deforestation. Implementation will be difficult - the fact that no voluntary commitments are currently being fulfilled is testament to that.

And action is needed in all major markets to avoid a two-tier market. For due diligence regulation to truly put market pressure on production companies, countries who import large amounts of high deforestation-risk commodities, such as China, similarly need to introduce regulatory action.

Some 80% of Chinese companies assessed in the Forest 500 currently have no deforestation commitments for any of the forest-risk commodities in their supply chain. Their purchasing practices continue to provide a market for deforestation-risk commodities.

Six years of Forest 500 reports have shown that voluntary commitments have not been enough to end tropical deforestation. There is no silver bullet to solve the problem, but EU legislation could be another piece in the forest governance jigsaw, which is very far from being solved.

 

Photo: yisris via flickr.com , creative commons licence

Pendrill et al (2019).  Deforestation displaced: trade in forest-risk commodities and the prospects for a global forest transition. Environmental Research Letters 14(5). doi: https://doi.org/10.1088/1748-9326/ab0d41