One of the major challenges that the current European business environment is to keep up with all the current ESG (Environmental, Social, and Governance) reporting legislation under the CSRD and the new action-driven requirements that are on the horizon, such as the proposed Corporate Sustainability Due Diligence Directive (CSDDD), proposed Forced-labor ban Act and the final Regulation on Deforestation Regulation (EUDR). The newly introduced EUDR has been formally adopted and will be the most urgent one of the action-driven legislation on the list that needs to be taken into account by international businesses. To effectively manage ESG standards in the long term, it is crucial that businesses are aware of the overlap between the different ESG legislations.  

This article is written by Gidion Lont ([email protected]) and Hendrik Bastiaans ([email protected]). Gidion and Hendrik are both part of RSM Netherlands Business Consulting Services with a specific focus on Sustainability and Supply Chain Management.

The EUDR mandates specific actions regarding certain products and commodities entering the EU market. These items can no longer be made available unless they meet stringent criteria. Products harvested after December 2020 must be deforestation-free and comply with relevant production legislation in their country of origin such as respecting land use, environmental and forest-related regulations, labor rights, international human rights standards, FPIC principles, and compliance with tax, anti-corruption, trade, and customs regulations. Additionally, they must be accompanied by a due diligence statement certifying minimal risk of non-compliance with the EUDR. 

All the relevant products are classified with a Combined Nomenclature (CN) code in Annex I of the EUDR.  All goods are imported under a specific CN code to support customs and trade processes. Affected product groups listed in Annex I of the EUDR:

Included commodities:Example of derived products:                     
1. Coffee
2. Cocoa
3. Cattle 
4. Palm oil
5. Soya
6. Rubber
7. Wood		1.Coffee, Coffee substitutes containing coffee
2.Cocoa butter, Chocolate
3.Leather, Meat
4.Palm nuts, Palm oil derivatives, Glycerol 
5.Soybeans, Soy-bean flour and oil
6.Pneumatic tires and inner tubes, Apparel made with vulcanized rubber
7.Fuel wood, Furniture, Casks, Pulp and paper, Printed books

Large operators and traders must review their supply chains and implement due diligence processes by December 29, 2024, while micro and small operators have until June 30, 2025. Any remaining non-compliant inventory after December 29, 2024, cannot be marketed by large operators and traders. Sanctions outlined in the EUDR will be enforced for non-compliance such as fines, bans, exclusions and enforcement costs liability. 

The EUDR requires operators and traders to establish and maintain a 'due diligence system' consisting of procedures and measures to ensure compliance with relevant products. Before placing products on the EU market or exporting them, operators and non-micro and small SME traders must follow a three-step due diligence process:


 

Finally, a due diligence statement must be submitted to the competent authority via a dedicated information system set up by the European Commission. If the due diligence reveals significant risks of non-compliance, the products cannot be placed on the EU market. The national customs authorities will execute the enforcement when the goods in scope are being lodged before entering the European Union market.

Connecting the EUDR with your current CSRD reporting 

As with many regulatory requirements, we observe a clear overlap between the EUDR obligations, Corporate Sustainability Reporting Directive reporting and the upcoming Corporate Sustainability Due Diligence Directive (CSDDD) requirements. All three focus on similar topics and require risk assessment procedures, the efforts of which could be combined to achieve efficiency in preparing for the compliance obligations.

When preparing for your CSRD report there is a requirement to do a double materiality assessment. A materiality assessment requires identification and assessment of ESG impacts, risks and opportunities in the company’s own operations and the supply chain and is designed to help companies assess the relative importance of specific ESG topics to organizations. Topics to be included in the assessment include impact on biodiversity, the workforce employed (including supply chain workers), (indigenous) communities and corporate business conduct. Similarly, the CSDDD requires an impact-driven risk assessment and mitigation of these risks of environmental and human rights risks in the own operations and the supply chain. EU companies importing and exporting products in the scope of the EUDR (such as wood and soya products) will need to take into account the risk of illegal deforestation, child labor, worker rights abuses, and corruption through risk assessment and mitigation. 

The risk assessments and included topics required for the CSRD and CSDDD align with the previously described requirements of the EUDR. Businesses are therefore recommended to pre-assess the efforts and processes that are required for CSRD, EUDR and CSDDD and find the overlap for their assessments and risk mitigation activities. By identifying this overlap, processes regarding information gathering, risk assessment, and mitigation may be combined in order to achieve increased efficiency in preparing for the three obligations. 

RSM is Thought Leader in the field of Supply Chain and Sustainability consulting. We offer frequent insights through training and sharing of thought leadership that is based on a detailed knowledge of regulatory obligations and practical applications in working with our customers. If you want to know more, please reach out to one of our consultants.