EU law combats forest loss, helps investors identify supply chain risks

By Martin Stavenhagen, Policy Specialist, Climate and Transition, and

Jonathan Ho, Specialist, Environmental Policy

Despite decades of actions and commitments, global deforestation rates remain persistently high. An area roughly the size of the European Union (420 million hectares) of forest has been lost since 1990.^[1] The world is not on track to stop and reverse forest loss by 2030, as agreed by 145 countries at COP26 in Glasgow in 2021.^[2] This failure to act increases climate risk: deforestation and land-use change contribute up to 21% of global greenhouse gas emissions.^[3]

Forests are some of the richest biological areas on earth and provide critical ecosystem services for society and the economy. More than half of the world’s GDP – or $58 trillion of economic value generation – is dependent on nature.^[4] The EU estimates that every euro invested into nature restoration adds another €4 to €38 in benefits.^[5] At the same time, EU consumption contributed to about 10% of global deforestation – which presents systemic risks to business, investors, and the wider economy (see this video to learn more about how forest loss feeds systemic risk).

Focusing on EU drivers for deforestation

The EU Deforestation Regulation (EUDR) is the most comprehensive approach yet to tackle deforestation driven by EU countries and to improve supply chain transparency. It replaces and expands the scope of the former EU Timber Regulation and introduces stronger accountability requirements for all actors along the value chain. Essentially, the EUDR will allow products to enter and/or be exported by the EU only if they have been verified as not contributing to deforestation or forest degradation.

The regulation covers seven commodities that have been identified as major drivers for EU-caused deforestation: palm oil, soya, wood, cocoa, coffee, cattle, and rubber and specific products derived from these commodities. For these commodities and related products, companies will need to trace the geolocation of product origins. Companies will also have to provide an assessment of potential risks and mitigation measures, and a public due diligence statement.

For investors, more precise geolocation and traceability information will improve their capacity to assess investment risks and opportunities related to nature and climate impacts. Potential fines for non-compliant companies will increase the incentive for investors to scrutinise companies that source commodities from higher-risk locations.

A large step forward for climate and nature

The adoption of the EUDR marks a significant policy milestone in addressing deforestation in European supply chains and elevates standards for deforestation- and conversion-free trade. Originally adopted in 2023 and scheduled for implementation in 2024, the rule was heading for two years of delay and a weakening of deforestation criteria. However, a compromise was reached in Parliament to keep the regulation intact, delaying implementation by only one year to December 2025.

Retaining the EUDR’s original language is a win for climate and nature. However, the delay has resulted in added costs for companies that had been preparing for compliance since 2023, leading to some companies publicly opposing postponement. In addition, investors representing €1 billion in assets signed a statement in support of swift EUDR implementation.

The EUDR is no silver bullet for deforestation, but it helps manage supply chain risk.

Demand for stronger due diligence and traceability measures is also underlined by stewardship initiatives like the PRI’s Spring, which focuses on deforestation and responsible political engagement and is endorsed by more than 220 institutional investors.

Just implementation is key to success

Producer countries for in-scope commodities have raised concerns about the difficulties of complying and associated costs, especially for smallholder farmers. To address these concerns, the EU has committed €70 million for the Team Europe Initiative on Deforestation-free Value Chains to provide technical assistance and capacity building for trade partners and producers. It also offered guidance, information system and training manuals to support implementation by in-scope stakeholders and companies. Adequate support and close cooperation with stakeholders – farmers, trade partner countries, and companies – is key for the EUDR’s successful implementation.

EUDR’s success will depend on a just and effective implementation.

To streamline implementation, the European Commission is preparing a country-risk classification system that specifies benchmarks and due diligence requirements for high, medium, and low deforestation-risk countries. The Commission will need to ensure this framework is based on objective and science-based criteria.

Next steps

The implementation delay creates opportunities for all stakeholders:

Companies should use the delay to strengthen their supply chain traceability mechanisms and risk assessments.
The Commission should use this time to work collaboratively with companies and trade partners to ensure a just and smooth implementation of the EUDR – and provide further financial and technical support where needed.
Investors have an opportunity to start reviewing their portfolios to better understand their deforestation exposure and to begin engaging with investee companies on this issue.

With COP30 seven months away, responsible investors are seeking progress toward rapidly reducing emissions. The EUDR’s taking effect one month later is an important reminder of the role investors can play in managing system-level deforestation risk.