About 9 million hectares of forest are lost to new agricultural use every year —an expanse the size of Portugal. The benefits of agricultural commodities such as soy, cattle, palm oil, wood, cocoa, coffee, and rubber are easy to calculate through sales figures along various supply chains. The costs of deforestation—biodiversity and ecosystem-services losses, water-cycle disruption, erosion and desertification, the displacement of indigenous communities, and the contributions to climate change among them — are harder to quantify. But they are exceedingly high.
The European Union’s Regulation on Deforestation-free products, a.k.a. the EU Deforestation Regulation (EUDR), takes aim at those costs, and supply chain managers are going to bear the brunt of addressing them. While EUDR compliance goes beyond technology, technology can relieve much of the burden.
The EUDR in a nutshell
The EUDR went into force on June 29, 2023; starting Dec. 31 (and, for SMEs, on June 30, 2025), it will require any business in the supply chain that places any of the seven deforestation-linked commodities mentioned above into the EU market to provide auditable proof that its products didn’t come from recently deforested areas, didn’t contribute to forest degradation, and don’t fall foul of local laws.
Trillions of euros in trade encompassing industries including agribusiness, food and beverage, furniture, mill products, chemicals, pharmaceuticals, cosmetics, consumer products, and even automotive (rubber in tires; leather on seats) are affected. While the general state of EUDR readiness still appears to be low, some industries are better prepared than others. Those dealing in palm oil have experience with International Sustainability & Carbon Certification (ISCC) and Roundtable on Sustainable Palm Oil (RSPO) certificates. For others such as automakers, EUDR-type mandates may be less familiar.
Regardless, companies found to be non-compliant will risk fines of 4% or more of annual EU revenues; product seizure and confiscation of revenues associated with them; temporary prohibition from marketing, offering, or exporting the goods in question; temporary exclusion from public tenders; and the risk of damage to public relations arising from the public posting of offenders and sanctions imposed by the European Commission. The reputational damage may well prove to be the most costly for many companies.
While some of the burden of EUDR proof involves classic supplier risk analysis, that’s only the start. Compliance will require detailed data regarding the provenance of each EU-bound delivery, down to geolocation-verified plot level. A due-diligence statement including data and documents about the products and country of production (the EUDR takes country/region-specific deforestation risk into account) must be filed for relevant products entering the market, and then stored for five years. One of our EU-based customers estimates that they’re facing a deluge of 150,000 EUDR due-diligence statements each year.
There’s more to it (the regulation’s .pdf is 42 pages long), but that’s the gist. So, what are the keys to complying with it?
What to do to comply with the EUDR
Compliance will take on-the-ground legwork, some of it involving field reps visiting farms and plantations. Companies must build closer relationships with their suppliers in order to explain the consequences of all parties being EUDR compliant, conduct comprehensive supplier assessments using proven tools, and, if needed, work on mitigation strategies, which are also part of the EUDR mandate.
The knottier aspects of EUDR compliance center on the need for an extreme degree of traceability throughout often long and convoluted supply chains further muddied by the reality that many EUDR-targeted products can be sliced and diced, combined and mixed many times over between farm and consumer. Add to that the sheer scale and multinational nature of the markets involved and the regulation’s thorough reporting requirements, and you have a clear need for technological tools to tackle EUDR.
What do these tools do? The general idea is to bring the sort of traceability and supply chain transparency to bulk raw materials that comes with scanning a barcode on a consumer product. They accomplish that in a few ways. They integrate with ERP systems, because that’s where supply chain data related to procurement, manufacturing, and sales live. These systems then create blockchain tokens that represent the products, product volumes, and their origins, thereby producing digital twins that persist through intermediate and finished products and are accounted for using segregated or mass-balance accounting as appropriate.
More than just EUDR compliance
At the same time, the systems track geographic information system (GIS) shapefiles — a data storage format for storing the location, shape, and attributes of geographic features — from specific product origins, concatenating those shapefiles as products get mixed, combined, refined, and converted through the supply chain. They then automatically place the amassed shapefiles into their proper EUDR due-diligence statements, and upload them straight to the EUDR reporting site. These systems enable up-to-date audit reports that include raw-material provenance, chain of custody, material movement, and net balances. Those help companies monitor status and also inform annual reports that EUDR requires.
The benefits of these systems go beyond EUDR compliance. They streamline risk mitigation by boosting transparency and raw-material traceability, and they minimize manual effort. They also demonstrate a seriousness about environmental commitments, and enable a boost to both reputational benefits and revenue through green price premiums.
The EUDR is making life harder for supply chain managers across an array of industries. It asks a lot of suppliers of some of the world’s most in-demand agricultural commodities. It threatens heavy penalties for non-compliance. The good news is, a combination of local collaboration and digital innovation can satisfy the EU’s mandate, and it’s hard to argue that saving fast-disappearing forests that no human system can recreate isn’t worth the effort.
Monica Gassmann is SAP’s Global Head of Sustainability for Industries.
Loek Titulaer is SAP’s Global Sustainability Principal.