Complex traceability requirements could nudge smallholders away from sustainable commodity markets
If your business is closely connected to ingredients and materials coming from forested regions, the chances are you will be fully aware of the need to develop understanding of the implications of the new EU Deforestation Regulation, or EUDR.
To recap, the incoming legislation, which came into effect in June 2022, requires companies trading in palm oil, beef, cocoa, coffee, rubber, soy and wood – and products derived from these commodities – to carry out extensive due diligence within their supply chain. This is to ensure the goods they have purchased do not result from recent deforestation, forest degradation or breaches of local environmental and social laws.
The EUDR defines deforestation-free products as those that have been fed with, or made using, commodities produced on land that has not been converted from forest to agricultural use.
And, from 30 December 2024, companies will be banned from selling goods on the EU market, or exporting them from the EU, unless they are deforestation-free, produced in line with relevant legislation in the country of production and covered by a due diligence statement indicating no more than a “negligible risk” of non-compliance. Failure to comply will result in big fines, potentially up to 4% of a company’s EU turnover.
Unlike previous EU laws on deforestation, such as the EU Timber Regulation, the EUDR aims to address logging that has happened legally in accordance with local laws of the country of production. According to the Forest Policy Trade and Finance Initiative, between 2013 and 2019, almost a third of deforestation in tropical countries was legal.
The new rules pose a number of significant challenges for compliance, not least in the way companies are being asked to follow due diligence processes. Businesses will have to collect detailed information that demonstrates their products’ compliance with the EUDR. They will have to carry out a risk assessment to work out the associated risk of non-compliance for each commodity or product. And they will have to mitigate any risk by carrying out independent audits or working with suppliers to help build capacity or make investments.
“The EUDR requires traceability all the way [to every farmer],” says Rashyid Redza Anwarudin, chief sustainability officer at Sime Darby Plantations (SDP) in Malaysia. “For large companies, that’s not a problem because we already have that data readily available to us. But for smallholders, with just two hectares of land, it’s a big ask.”
He points out that some smallholder farmers are not online or don’t even have phones. “How are you going to expect them to be providing shapefiles of their land to demonstrate compliance?”
In Malaysia, one of the world’s largest oil palm-producing nations, the government-regulated palm oil certification standard – the Malaysian Sustainable Palm Oil (MSPO) scheme – means compliance costs are already being incurred by smallholders. The EUDR introduces another layer of regulatory burden.
The complexity of the traceability requirements set out in the EUDR is a barrier that has also been highlighted by Agus Purnomo, formerly managing director for sustainability at Golden Agri-Resources. He is currently a senior adviser on sustainability at GAR.
He has argued that the need for the palm oil supply chain to be completely segregated is “technically possible but cost wise it is unaffordable”. Speaking at a recent CIFOR-ICRAF event in Jakarta, Purnomo illustrated his point by tracing the number of required sources for a single sales order of one product. “This would come from nine different batches at a refinery, which itself comes from 72 bulk batches, taken from 25 mills and back to 90 estates or plantations.” The situation is complicated further by the use of smallholders, where small “contaminations” can result in a shipment losing its “deforestation free” status, he said.
Another sticking point is the fact the EUDR does not recognise standards already being used by the palm oil industry, including MSPO and the Roundtable on Sustainable Palm oil (RSPO). “In Malaysia, 98% of industries are already certified to MSPO. We should acknowledge there are still gaps in these standards, work out what they are, and how to close them in a way that enables the standards to be recognised under the EUDR,” says Anwarudin.
He is also frustrated by the definition of what constitutes a forest, adopted by the new law. While the palm oil sector has worked hard, together with stakeholders, to develop the High Conservation Value and High Carbon Stock assessments of land, the EUDR is using the UN Food and Agriculture Organisation’s definition of forest.
Anwarudin points out that the FAO definition of a forest is about a certain height and a certain canopy coverage. In a tropical landscape, cleared land that might have been unattended for only five years, and that has now grown into a young, regenerated forest, is considered to be the same as a long-standing forest. “These smallholders now won’t be able to develop their land under the EUDR definitions of what constitutes a forest,” he says.
According to Purnomo, just 1% of smallholders across Indonesia can be considered “cleanly and clearly” certified. That means the EUDR will effectively ban the remainder of smallholders from accessing the EU market.
“We need to be as inclusive as possible when it comes to transitioning to a low carbon economy – and we can’t leave smallholders behind,” Anwarudin argues. “In Malaysia alone, we have 500,000 smallholders. Right now, the requirements set out by the EUDR will mean most smallholders will just sell their oil to China or India.”
China and India do not have strict import regulation on avoiding deforestation – which means that farmers selling to those markets will not have to comply with the EU rules. The implication is that rather than helping to stop deforestation in higher risk areas, EUDR may in fact exacerbate it.
So, what needs to happen? Anwarudin suggests a need for more engagement between the EU and other governments to come up with a practical solution that would serve the interests of all parties. “Yes, we are aligned in wanting to eliminate deforestation. But we need to work together, recognising efforts that have already been done without reinventing the wheel, and avoid any additional compliance costs for smallholders.”
For the palm oil sector, in particular, he sums up the challenge: “The risk is that we will resolve the issue of deforestation, but the deforested oil will simply be channelled to other parts of the world.”
