In December 2024, new EU regulations promoting the consumption of ‘deforestation-free’ products and reducing the EU’s impact on global deforestation and forest degradation, will come into force. Regulation (EU) 2023/1115 is a significant piece of legislation aimed at ensuring products within the EU do not contribute to deforestation or forest degradation worldwide, and is expected to bring down greenhouse gas emissions and biodiversity loss.
The EU Deforestation Regulation (EUDR) will fully come into force on 30 December 2024, providing businesses with an 18-month transition period to align with the new requirements.
Micro and small enterprises will have an extended adoption period until 30 June 2025.
As a Corporate Venture Capital (CVC) fund with a portfolio that includes consumer brands operating in the Wellbeing & Stimulation space, we took a close look at the new regulations, to better help our portfolio companies as well as other founders, start-ups, companies or CVCs seeking to navigate the new legislation.
Key Requirements of the EUDR
The EUDR mandates that companies ensure that commodities, such as cocoa used in chocolate production to rubber used in rubber belts or seals, are not sourced from deforested land post 31 December 2020. A complete list of these products is set out in Annex 1 of the EUDR. Products sourced from wood may fall under the scope of Annex 1, however, if deemed covered by the EU Timber Regulation, and subsequently produced before 29 June 2023 and placed on the market after 20 December 2024, compliance in this regard is delayed until 31 December 2027.
If your company may utilise products that fall under Annex 1, you should seek independent legal advice.
Companies must provide a Due Diligence Statement (DDS) confirming their products are deforestation-free and legally produced.
Impact on Consumer Brands
For consumer brands in the Wellbeing & Stimulation space - for example, those involved in chocolate production, or import products that may fall under the scope of Annex 1 - the EUDR will have significant implications. These companies must ensure their chocolate products comply with the EUDR and are covered by a DDS when crossing the EU border. The responsibility for due diligence and uploading the DDS to the EU’s Information System falls on the owner of the chocolate at the time of import, which could be an EU or non-EU entity.
Companies could be directly responsible for EUDR compliance if they own the products as they cross the EU border, qualifying them as the EU importer. In this case, they will need to upload the DDS themselves. Alternatively, if they are not the EU importer, they will be indirectly subject to EUDR requirements because their EU customer will require the necessary information to determine whether the products are deforestation-free and legally produced.
Consequences of Non-Compliance
Companies failing to comply with the EUDR face severe penalties, including fines of up to 4% of their annual turnover in the EU, seizure of goods, supply chain delays, trade sanctions, loss of market access, and negative publicity.
Role of Corporate Venture Capital Firms and Next Steps
As investors, CVCs, such as Btomorrow Ventures, are not subject to EUDR enforcement risk but the corporates may be subject should they be supporting with the distribution efforts of the start-up. However, it is crucial to ensure that portfolio companies have assessed their obligations under the EUDR and are aware of the necessary compliance steps. It is important each company obtains independent legal advice to review the impact of this legislation should they believe they are remotely impacted by it.
Next Steps for Investment Funds:
- Review Portfolio Companies: Identify which products produced by portfolio companies fall within the scope of the EUDR.
- Review Supply Chains: Ensure that relevant companies are aware of the EUDR and are reviewing their supply chains for compliance.
- Engage with Portfolio Companies: Discuss the importance of EUDR compliance and the potential risks of non-compliance.
- Monitor Developments: Stay updated on any further guidance or updates on the EUDR as the enforcement date approaches.
- Obtain Independent Legal Advice: To provide further clarity on what action you may or may not need to take.
Next Steps for Companies Preparing for EUDR Compliance:
- Review Supply Chains: Assess supply chains for deforestation risks.
- Implement Due Diligence Systems: Establish systems to ensure compliance with the EUDR.
- Engage with Suppliers: Work with suppliers to ensure sustainable sourcing practices.
- Stay Informed: Keep up to date with the latest developments and guidelines related to the EUDR.
- Obtain Independent Legal Advice: To provide further clarity on what action you may or may not need to take.
How to Comply with the EUDR
For companies importing products that fall under the scope of the EUDR into the EU, compliance with the new regulation involves several key steps:
- Due Diligence Statement: Issue a statement confirming products have not caused deforestation or forest degradation before placing them on the market.
- Information Collection: Gather detailed information about the supply chain to demonstrate compliance.
- Risk Assessment: Conduct a risk assessment for each product to determine the likelihood of non-compliance.
- Traceability: Implement measures to ensure the cocoa used in chocolate bars can be traced back to deforestation-free sources.
- Sustainable Sourcing: Source cocoa responsibly from suppliers who adhere to sustainable land-use practices.
- Regular Updates: Stay informed about the latest EUDR requirements and update compliance measures as needed.
By following these steps, understanding and preparing for the EUDR, consumer brands in the Wellbeing & Stimulation space can ensure compliance, avoid penalties, and contribute to global efforts to combat deforestation.
Should you have any further questions on understanding EUDR and the impact it may have on your company, please do not hesitate to reach out to Peter Wozny (Peter@btomorrowv.com) who heads the BTV legal team, for more information.
