According to the World Wide Fund for Nature, between 2016-2018, around 21 million hectares (an area almost the size of the UK) was required each year to meet UK demand for seven forest-risk commodities (including cattle, cocoa, coffee and maize) (“FRC”) alone. Under new UK and EU legislation coming into force, companies will be required to exercise due diligence in their supply chains with the aim of helping to ensure the products we buy do not harm the world’s forests.  The UK rules will apply to FRCs but the EU rules are wider, and fines and monetary penalties under either regime can be substantial.

UK regulations on forest risk commodities

The Forest Risk Commodities Scheme will be introduced under Schedule 17 of the Environment Act 2021.  Secondary legislation will be laid when parliamentary time allows. It will require regulated businesses to establish and implement a due diligence system for any regulated commodity, and any products derived from them, that they use in their UK commercial activities. 

The commodities in scope are non-dairy Cattle products (beef and leather), cocoa, palm, and soy. 

Organisations using these commodities in UK supply chains with a global turnover of over £50m will be required to comply with the regulations, although organisations whose use of the regulated commodities does not exceed the annual volume threshold of 500 tonnes may submit an exemption.   

Organisations (whether in scope as suppliers or service providers to organisations in scope) will have a grace period to prepare for regulation before the beginning of the first reporting period. 

Unlimited variable monetary penalties will be available to regulators as part of civil sanctions.

 

European Parliament and Council agree new corporate due diligence rules

The European Parliament and Council have agreed a new Directive on corporate sustainability due diligence. It sets out obligations for companies to mitigate their negative impact on human rights and the environment, including in relation to child labour, slavery, labour exploitation, pollution, deforestation, excessive water consumption or damage to ecosystems.

We do not yet have the full text but, according to the press release, companies will be required to integrate so called “due diligence” into their policies and risk-management systems, including descriptions of their approach, processes and code of conduct. In addition, EU companies, including in the financial sector, will also have to adopt a plan to ensure that their business models comply with limiting global warming to 1.5°C in line with the Paris Agreement. 

Rules applicable to big companies and those in high-risk sectors

The legislation will apply to EU companies and parent companies with over 500 employees and a worldwide turnover higher than 150 million euro. The obligations will also apply to companies with over 250 employees and with a turnover of more than 40 million euro if at least 20 million euro are generated in one of the following sectors: manufacture and wholesale trade of textiles, clothing and footwear, agriculture including forestry and fisheries, manufacture of food and trade of raw agricultural materials, extraction and wholesale trade of mineral resources or manufacture of related products and construction. 

For our UK readers, it is worth noting that it will also apply to non-EU companies and parent companies with equivalent turnover in the EU.

Companies will be required to identify, assess, prevent, mitigate, terminate and remedy their negative impact and that of their upstream and downstream partners, including production, supply, transport and storage, design and distribution on people and the planet. To do so, the press release says that they will be required to make investments, seek contractual assurances from their partners, improve their business plan or provide support to their partners from small and medium-sized enterprises.

Information portal for companies

Firms will also be required to meaningfully engage with those affected by their actions, introduce a complaints mechanism, communicate their due diligence policies and regularly monitor effectiveness. In addition, EU governments will be required to create practical portals, dedicated to companies’ due diligence obligations, that will provide information on content and criteria and related European Commission guidance.

Sanctions and supervision

Each EU country will designate a regulator to ensure firms are complying with the new rules which will be able to launch inspections and investigations and impose penalties on non-compliant companies, including “naming and shaming” and imposing fines of up to 5% of their net worldwide turnover.

Companies will be liable for breaching their due diligence obligations and their victims will have the right to be compensated for damage. In addition, compliance with due diligence obligations can be used as part of the award criteria for public and concession contracts.

Next steps

Once published in the Official Journal, the Directive will enter into force 20 days after publication and member states will have two years to transpose the provisions of the Directive into national law.