The new EU Deforestation Regulation (EUDR) aims to cut greenhouse gas emissions and help limit biodiversity loss by influencing global action on climate change by targeting commodities linked to deforestation.
Under the EUDR, companies – both EU and non-EU who supply and sell into the EU – that are trading in certain commodities such as wood and leather will need to prove their products and value chains are deforestation-free.
The EUDR comes into force between the end of December and, according to a whitepaper from GlobalData, goes much further than previous regulations on this issue by banning materials linked to deforestation and applying it to the entire value chain.
The EUDR covers products made or derived from cattle, cocoa, coffee, oil palm, rubber, soya and wood if they are sold in the EU. The regulation must be followed by any company involved in the value chain of these commodities at any point, whether inside the EU or not.
Under this regulation, companies must prove that none of their product’s components, ingredients, or production processes have contributed to deforestation. The onus will be on companies to prove that not only their product, but their product’s value chain is deforestation-free.
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By GlobalData
What changes can we expect to see under the EUDR?
As countries risk levels of deforestation are determined by the EU, companies sourcing from those locations may be forced to move their sourcing operations to ones that are lower-risk to avoid getting fined up to 4% of their annual turnover and having products seized by the EU to reduce the administrative burden throughout their supply chains.
Costs are set to spike for farmers and also companies in terms of the premiums they incur to ensure compliance as well as potential business disruption.
Companies will be expected to put GPS tracking into place and there will be demands under the EUDR of “unprecedented levels of traceability and transparency”.
How is apparel impacted?
According to Origem Sustainable Sourcing, brands and retailers of footwear, leather goods and accessories that produce, buy or retail finished products containing leather (which have not been processed by the brand or retailer) are not directly concerned.
But with the entire supply chain affected, they are likely to see disruption to where they source from.
“The supply chains of the commodities targeted by this new regulation are in most cases highly complex, because they are globalised, operated by multiple players and often opaque,” a LinkedIn post from Origem explained.
“In the case of the beef industry, the traceability systems in place – where they exist – are generally designed to track meat carcasses, to meet the requirements of the agri-food industry. The traceability of derived and processed products, such as leather, is therefore often lost at slaughterhouse level, making it virtually impossible for the last players in the chain using the hides and skins to trace them back to the various places where the animals were born and reared,” it added.
When it comes to wood, while again, the apparel sector may not be directly impacted as it doesn’t affect wood-based fibres, the sector will feel the repercussions of the impact to the packaging industry.
A spokesperson for Bestseller told Just Style it would predominantly affect the supply of paper-based products such as its packaging.
But for several years it has been working with a monitoring organisation to ensure compliance with the EUTR (EU Timber Regulation Act), and it believes the EUDR is simply an extension of these activities.
“We’ve worked for several years with WSP, who on behalf of the authorities conducts an annual audit of Bestseller’s EUTR procedures to confirm our imports of EUTR products are compliant with the EUTR. We are consulting with WSP to make sure we are ready for the EUDR requirements as well, when they take full effect.”
The likeliest impact of the changes is going to be on the prices paid by consumers. In fact, agribusiness consultants at data and analytics company GlobalData estimate that EUDR compliance premiums for companies operating in the supply chain for just two of the targeted commodities, oil palm products and their derivatives (such as crude palm oil (CPO) and palm kernel oil (KPO)), and rubber could be in excess of $1.5bn alone.
‘Greenflation’
The term ‘greenflation’ refers to the phenomenon of sustainability and climate change mitigation efforts that cause price increases. In the context of EU legislation, much of what has been discussed will add extra operational costs to producers outside the EU and companies inside the EU importing goods. There is precedent suggesting this additional cost will be passed onto the consumer.
The report points to phenomena including the war in Ukraine which led to an energy price hike across Europe, the costs of which were passed on to consumers by energy companies and consumer goods companies that saw their manufacturing and transit costs rise.
But also the China Zero Covid policy that caused supply chain chaos stemming from backlogs in major port cities and a shortage of shipping containers, FMCG and foodservice companies passed the costs onto the consumer.
“If one views the onset of a new round of stricter-than-ever regulation from the EU through a similar lens, one can assume that some of the increased costs will be passed onto the consumer through price increases,” says the report, adding that the products most at risk are ones containing materials specified in the EUDR.
GlobalData analyst Fred Diamond comments: “The gap between big and small companies could get wider as larger companies are more able to shoulder the additional regulatory burden. The exact impact on consumers will depend on a variety of factors, including how companies choose to respond to the regulation, the extent to which the regulation is enforced, and how much assistance EU member states are willing to give to supplier countries to help them align with the new rules. However, with recent news reports confirming that the world’s top climate scientists expect global heating to go well beyond the current 1.5C target, sustainability regulation associated with cutting greenhouse gas emissions, such as the EUDR which targets deforestation, remains an urgent priority for the planet.”
EUDR is “catalyst for change”
Speaking to Just Style exclusively founder and executive director at Canopy Nicole Rycroft explains the EU Deforestation Regulation shouldn’t be viewed as negative, but instead for the opportunities it presents.
She says it is “precedent-setting legislation for global sustainability.”
“In our conversations with fashion industry suppliers, the EUDR is the bar by which global suppliers are aligning their sourcing practices. It presents an opportunity for brands and retailers to eliminate risk from their forest product supply chains and to shift towards lower-risk and lower-impact next-gen alternatives for rubber, leather and paper-based packaging. Although man-made cellulosic fibre (MMCF) textiles like viscose and rayon are not yet covered under the regulations, many brands are working to integrate MMCF textiles into their EUDR systems given it’s anticipated to just be a matter of time until they’re formally required under the regulations as well.”
Rycroft says companies should not be focused on the cost of shifting to eco-friendly alternatives when carbon-intensive, unsustainable forest products are “costing us the earth.”
“The projection of cost increases for EUDR compliant materials underscores that a significant percentage of forest-derived products on today’s market are likely coming from damaging practices in high-carbon and biodiverse forest landscapes. The EUDR may create upward pressure on the price of forest-based packaging, MMCF or leather products due to lower volumes of compliant products coupled with steady or rising demand. However, price increases are projected to escalate over the coming decade as global demand for forest products intensifies and larger swaths of forest burn due to the climate crisis.”
She notes this is incentivising brands and producers to embrace low-carbon next-gen alternatives, such as packaging derived from agricultural residues and viscose textiles derived from waste textiles.
“These next-gen solutions not only help brands and suppliers meet EUDR requirements, they also help brands avoid turbulent pricing as wood sourcing becomes increasingly constrained.
“The EUDR is a catalyst for meaningful change – and along with other circular economy legislation and the EPR, is motivating businesses to invest in transparent, traceable, low-carbon sourcing and to support smallholders in transitioning to sustainable methods. The apparel sector stands at the forefront of this movement with the potential to redefine industry practices and contribute significantly to global climate goals.
“EUDR compliance is a powerful opportunity for brands to champion low-impact sourcing, improve their competitive edge, and contribute to the preservation of our planet’s forests and biodiversity. The competitive, social and planetary benefits are immense.”
