What is the EU Deforestation Regulation?
The EU Deforestation Regulation (EUDR) is a legal framework designed to curb the European Union’s contribution to global deforestation and forest degradation. It came into force in June 2023, with compliance deadlines starting on 30th December 2026 for large and medium-sized companies, and on 30th June 2027 for smaller firms.
Who does EUDR apply to?
The regulation applies to companies that place, make available, or export certain commodities and derived products in the EU market. These include:
Cattle (e.g. beef, hides, leather products)
Cocoa (e.g. beans, powder, paste, chocolate)
Coffee (e.g. roasted, decaffeinated, husks)
Palm oil (e.g. palm oil, kernel oil, derivatives)
Rubber (e.g. raw rubber, tires, belts, hoses)
Soy (e.g. soybeans, meal, oil, cakes)
Wood (e.g. paper, packaging, furniture)
To comply, companies must ensure that these products:
Are deforestation-free (i.e., not produced on land deforested after 31st December 2020)
Are legally produced in accordance with local laws, and
Are fully traceable to the plot of land where they were produced.
The rules apply to “first operators” i.e. entities that first place relevant products on the EU market or export them, who will need to submit due diligence statements with geolocation data to prove products are deforestation-free. Downstream operators and traders will not need to submit separate statements but must keep and pass on the reference number of the initial due diligence statement.
EUDR Requirements
The EUDR due diligence obligations fall into three main steps:
Collecting Information
Companies must gather data proving that products are deforestation-free and legally produced. They’ll need to provide geolocation data for all land where relevant commodities were grown to verify no deforestation occurred after 31st December 2020.
Companies will also need to engage with their suppliers to provide evidence of compliance with local laws in the country of origin. If they cannot provide this information, their product cannot be traded in the EU.
Due diligence statements for each product must also be submitted through the EU’s central information system, and all relevant documentation must be stored for a minimum of five years.
2. Risk Assessment
Based on the collected data, companies must assess whether there’s a non-negligible risk of non-compliance. Factors include:
General deforestation risk in the country of origin
Reliability of sources
Plausibility of the information
If the risk is deemed negligible, the product can be traded after submitting the due diligence statement.
3. Risk Mitigation
If the risk is not deemed negligible, companies must take steps to reduce it, e.g.:
Requesting more documentation
Conducting audits or independent checks
Supporting suppliers in improving traceability
If the risk remains above a negligible level, the product cannot be traded and no due diligence statement can be submitted.
Why it matters
While the EUDR directly targets commodity producers and traders, its ripple effects could be felt across global value chains, including portfolio companies and investment managers.
Potential issues for asset managers and portfolio companies include:
Supply chain risks: companies who fail to comply may face trade restrictions, fines (of up to 4% of annual turnover), or reputational damage, which may impact financial performance and valuations both for companies and their private equity backers.
Compliance and due diligence expectations: investors will need to assess whether portfolio companies have robust systems in place for traceability, legal compliance, and sustainability reporting. As this is a new topic for many, this could take time to set up and get to grips with, and may require additional resources to manage.
Nature-related financial risk: as deforestation becomes a material sustainability risk, the EUDR aligns with broader trends in nature-related disclosures (e.g., TNFD), increasing pressure on investors to integrate biodiversity and land-use considerations into decision-making.
Exit readiness: for private equity, ensuring compliance with EUDR may be a value creation lever and a de-risking strategy ahead of exits, especially for companies with EU market exposure.
Looking Ahead
The EUDR is part of a growing wave of EU environmental regulations with global implications. As a first step, firms need to understand their potential exposure to deforestation across portfolios. Some may also need to begin engaging with their companies to support them in understanding what they’d need to do to ensure compliance, and how to implement traceability and certification systems. Some may also need to start integrating deforestation risks into sustainability assessments and updating their responsible investment and sustainability policies to include EUDR compliance.
Companies with deforestation exposure will need to assess their exposure across high-risk geographies and suppliers and implement systems to collect geolocation coordinates for relevant products, and ensure their suppliers can provide verifiable data.
We don’t yet know how the regulation will be enforced but at the very least, firms and companies are advised to familiarise themselves with the requirements and start to consider their deforestation risk.
If you’d like to know more about this topic or understand how you may be affected by the EUDR, please get in touch.
Further Reading
