EU Regulation on Deforestation-Free Products:
Guidance and recommendations for corporates and financial
institutions
1. Summary
Deforestation and forest degradation significantly contribute to climate change and biodiversity loss. The United Nations
Food and Agriculture Organization (FAO) reports that from 1990 to 2020, an area larger than the European Union,
approximately 420 million hectares of forest, was lost to deforestation.1 The Intergovernmental Panel on Climate Change(IPCC) also noted that between 2007 and 2016, 23% of all anthropogenic greenhouse gas emissions stemmed fromagriculture, forestry, and other land use. It's estimated that approximately 11% resulted from forestry and deforestation,
while the remaining 12% was linked to direct emissions from agricultural practices such as livestock rearing and the use offertilisers.2
The EU Regulation on Deforestation-Free Products (EUDR) marks a significant milestone in addressing deforestation
associated with European supply chains by covering commodities associated with both legal and illegal deforestation. This
regulation serves as a solid message to entities involved in agricultural commodity production that crops produced on clearedplots after December 31 2020 will not be able to be sold in the EU, and sets a precedent for other consumer markets,
encouraging the elevation of global standards for deforestation and conversion free (DCF) trade.
The implementation of this regulation presents both opportunities and challenges. The requirement for due diligence andplot-level traceability of relevant commodities is crucial to ensuring compliance and provides an opportunity for affectedcompanies to build full internal visibility of supply chain dependencies and vulnerabilities. This has wide reaching benefits
including meeting the EU requirements on corporate sustainability and scope 3 reporting and the upcoming requirements
for due diligence. However, there are information challenges that raise concerns about the most cost-effective approach tomeet the requirements while effectively reducing deforestation on the ground.

2. Key aspects and recommendations▪
▪
▪
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Voluntary certification against credible criteria can demonstrate compliance with the requirements for stakeholders.
Transition plans provide a structured framework to help companies identify and guide their pathway to eliminate
commodity-driven deforestation from their supply chains.
Reporting plays a crucial role in conducting due diligence and demonstrating compliance with the information
requirements, risk assessment, and risk mitigation outlined in the EUDR.
Shifting from mere legal compliance to implementing best practices is vital for corporate resilience to climate risks.

3. Introduction
The European Union adopted the EUDR in 2023 to curb the EU market's impact on deforestation and forest degradationworldwide, and protect human rights. The EUDR aims to combat deforestation caused by forestry and agriculture byimplementing mandatory due diligence requirements that are geolocated to the point of origin and places liability forensuring the commodity has not been linked to recent (since 2020) land clearance on the operator and trader. This expands
the existing due diligence procedure of the EU Timber Regulation (EUTR) to encompass more commodities such as cocoa
and chocolate, coffee, soy, palm oil, cattle and beef, wood and rubber. In addition, it introduces several enhancements,
including a due diligence statement (Article 4), a geographic information requirement for tracking the origin of commodities(Article 9), increased customs cooperation (Articles 14 and 24), minimum inspection levels (Article 14), and country
benchmarking (Articles 25 and 26). The EUDR will consider any product as high-risk if it is linked to deforestation, even if
sourced legally as per local laws, marking a key difference from the EUTR, which only addresses deforestation caused byillegal timber logging.3
While the Regulation does not currently target financial institutions (FIs), there is a review clause that is foreseen to expand
the regulatory coverage and impose new obligations on FIs under the EUDR in the near future.

4. The EUDR in a nutshell
The European Commission will publish a list that categorises countries (within and outside the EU) as low, standard, or highdeforestation-risk. The list will be reviewed and updated periodically. As the identification of commodity origins is mandatory
under the EUDR through clear geolocation procedures, all commodities will be traceable back to source, regardless of thequantity or value. The regulation applies equally to products made within the EU or globally. Compliance also needs to ensurethat the origin of the commodity was not subject to deforestation after December 31 2020.
Companies must implement due diligence systems involving three key steps:
Firstly, collecting information about the commodity, supplier, and location of production (from Article 9 of the regulation).
Secondly, assessing and managing supply chain risk based on the information collected (Article 10).
Thirdly, implementing suitable mitigation measures that reduce deforestation risks to negligible levels (Article 11).
The obligations for operators and relevant authorities are related to the risk level of the country of origin, with simplified
procedures for low-risk areas and greater scrutiny for high-risk areas (outlined in Article 13). Steps two and three are
generally not required for low-risk countries.
Non-compliance can result in significant fines and possible exclusion from the EU market. The regulation will be implemented
by member states through their national laws and compliance will be ensured at the national level.
The incoming regulations will influence predominantly large corporations, providing an opportunity to overhaul existing
governance structures and re-examine commitments to sustainability. These new provisions shift from a regime primarily
focusing on information obligations to one that demands specific actions and choices for a socially and environmentally
sustainable future. This development is part of the EU’s ongoing effort to position Europe as a sustainability leader andimplement the Green Deal. This mission includes additional corporate sustainability regulations like the Corporate
Sustainability Reporting Directive (CSRD) and the proposed Corporate Sustainability Due Diligence Directive (CSDDD),
designed to introduce new environmental and human rights due diligence and reporting obligations for businesses. 4,5

5. Key implications for corporates and recommendations
5.1 Deforestation definitions and scope of ecosystems
The EU law aligns with the UN Food and Agriculture Organization, which defines deforestation as ‘the conversion of forest
to agricultural use, regardless of whether it is human-induced or not.6 The current definition has been criticised as being too
narrow and will be reviewed after one year to consider expansion into other wooded land, and after two years to consider
expansion into other ecosystems.7
5.2 Meeting the due diligence requirements
To comply with the EUDR and effectively manage risks and challenges, operators and traders must comprehensively
understand their supply chains. This includes knowing the different actors involved and being aware of activities at eachstage. This knowledge allows businesses to identify potential risks and challenges, such as supplier compliance andenvironmental impact. The EUDR does not permit a mass balance approach to commodities and requires that every unit of
the relevant commodity is geolocated and covered by the appropriate due diligence process.8
Climate Bonds encourages all companies to develop transition plans that identify emission sources and provide guidance on
how they can be mitigated through specific pathways, including Scopes 1, 2, and 3, as defined by the Greenhouse Gas
Protocol.9,10 Such plans are increasingly mandatory under recent EU legislation and are integral to the due diligence process.
Scope 3 relates to supply chains and the use of sold products where comprehensive mapping of supply chains (CDP) can
help companies comply with multiple regulations and enhance resilience to potential climate risks .11
5.3 Risk assessment and management
Assessing data gaps and non-compliance risk is crucial in meeting EUDR requirements. Having access to appropriate tools
can facilitate risk mitigation and compliance efforts. Therefore, companies need to ensure that their suppliers are alignedwith the same standards. This can be achieved by inquiring about suppliers' deforestation policies, procedures, and risk
monitoring practices within the supply chain.

Traders and operators gain valuable insights into their processes and risks by connecting the dots across the supply chain
and consolidating trusted data. Sector criteria help ensure regulatory compliance, identify areas of value creation, andhighlight potential risk areas.
5.4 Traceability, transparency and accountability
The due diligence requirement requires companies to gather data about the relevant commodities, emphasising theimportance of transparency and monitoring for the efficacy of due diligence. However, the diverse nature of the commoditysupply chain in the agri-food sector may challenge standardising traceability mechanisms and implementing technologies
crucial for verifying sources and audits. The complexity of agri-food commodity-supply chains further underlines the needfor guidelines on best practices for traceability and due diligence compliance.
5.5 Reporting and regulatory measure interlinkages:
The EUDR reporting requirement to consolidate all relevant supply chain information must align with existing and proposedsustainability reporting regulations in the EU. This is particularly relevant to the proposed CSDDD, which extends to all
operations and relationships across the value chains.12 Unlike EUDR, however, the CSDDD does not focus on specificcommodities or products.
A synergy between these policies would assist in meeting the mandate's disclosure requirements. Therefore, theCommission must clarify how these regulatory measures will consistently address deforestation, biodiversity loss, andclimate change. This clarity is expected in the upcoming amendments. Nevertheless, the EUDR is already contributing to the
future compliance and applicability of sustainable CSDDD due diligence and reporting obligations by providing
comprehensive and strict deforestation-free due diligence requirements.
In addition, companies should pay particular attention to existing national legal frameworks, for example, France, Germany
and Norway, which have adopted or are proposing national corporate due diligence rules.
5.6 Downstream operators and smallholders:
Effective engagement with suppliers is vital for successfully achieving no-deforestation goals, advancing supply chain
traceability, and tackling non-compliance issues. It is crucial for companies to communicate their expectations to their
suppliers clearly. Furthermore, it is essential to recognise that many suppliers, especially smallholders, may require support
and assistance to meet the new requirements.

6. Financial institutions
The EUDR does not encompass FIs but contains a review clause (mid-2025) that could result in an extension of its regulatory
coverage and new obligations for FIs under the EUDR or other EU legislation.13 Climate Bonds supports the expansion as FIs
are crucial stakeholders in preventing deforestation through capital allocation screening frameworks and identifying
progressive projects and clients to invest in and support.
Including FIs under the EUDR also obliges them to report on mandatory and voluntary principal adverse impacts under the
EU Sustainable Finance Disclosure Regulation (SFDR) and explain their due diligence procedures. Integrating deforestationdue diligence into existing risk management strategies, processes, and systems is essential to meet the requirements of the
SFDR. They ensure that these considerations are taken into account right from the start of any commercial decision-making
and risk assessments. The advantage of this approach is that it builds upon the substantial resources and procedures alreadyin place within the organisation.

7. Best practice guidelines
Encompassing essential sustainability aspects across commodities and their supply chains is fundamental for the agri-foodsystem transition and tackling deforestation. On this basis, third-party verified schemes and certifications are a valuable tool
to support companies progressing from legal compliance to adopting best practices. By enabling verification of land use andmanufacturing practices, these criteria offer comprehensive means to verify the due diligence systems of companies
concerning sourcing sustainable products, clarify the steps, and help companies identify how they are exposed to risk.

In this context, Climate Bonds is in the process of creating a framework for assessing transition strategies at the organisational
level. These comprehensive pathways and sector criteria will provide guidance to achieve agri-food company environmental
and social goals and actions, drawing inspiration from the Transition Finance Principles.14
7.1 Agri-Food transition programme
The Climate Bonds agri-food transition programme has been designed to assist in developing the transition plans andunderlying criteria that can deliver rapid and meaningful climate impact. It aligns with global goals to almost halve emissions
by 2030 and achieve net zero by 2050, following the guidelines of the Paris Agreement. Additionally, it addresses otherobjectives related to the food system.15
In pursuit of these goals, development of the Agri-food transition investment criteria began in 2021, and will cover crop
production, livestock production, and DCF supply chains. The set of criteria is expected to be ready for Certification under
the Climate Bonds Standard between 2023 and 2024. These new criteria are built upon existing agriculture Criteria, which
can already be used to certify assets and activities:▪ In the whole agricultural production unit,▪ Specific intervention in the agricultural production unit, and▪ Supporting activities outside of the agricultural production unit.
Currently, the eligibility criteria are divided into two components that must be met: focusing on a) eligible low-emission
agriculture (mitigation requirements) and b) climate resilience agriculture (adaptation and resilience requirements).

7.2 Climate Bonds guidance and tools to ensure EUDR compliance
Climate Bonds approach considers agri-food system objectives that extend beyond climate change, including land usechanges, biodiversity, water use and quality, food loss and waste, circularity, and a just transition. In particular:▪
▪
▪

Due Diligence: The upcoming DCF supply chain criteria are being designed to meet the requirements of the EUDR
and enable compliance to be demonstrated in one easy step through Certification.
Traceability: In response to the challenge of ensuring supply chain visibility, Climate Bonds offers clear guidelines
for operators, traders, and competent authorities on the best practices for monitoring and compliance.
Climate Bonds Standard and Certification Scheme: This initiative, launched in 2012, was originally created tobolster confidence in the green credentials of green bonds and other debt instruments. It serves as a tool tofacilitate quick investment decision-making. With the new Standard (SV4), the Certification's scope has been
expanded to cover general-purpose instruments, such as sustainability-linked debt instruments, assets, andentities. This requires all transition plans to include commitments that are free from deforestation andconversion.16

8. Conclusion
The EUDR introduces strict due diligence requirements which go beyond most current supply chain certification schemesthat allow for a mass balance approach. Under the EUDR, every unit of the relevant commodity sold in the EU must have thesupporting geolocation data and due diligence system. Climate Bonds is developing agri-food transition pathways andassociated criteria for the supply chain actors to align with the requirements of the EUDR, while providing a clear
understanding to investors of what is green, and clarity to the regulators on sustainable transition narratives.
The framework goes beyond regulatory obligations, encompassing a broader range of sustainability topics. It includes anassessment tool to evaluate entity-level agri-food transition plans and establishes criteria for supply chain procurement
strategies. This enables operators and traders to extend their sustainability efforts and go above and beyond what is
mandated by regulations.

1

FAO, 2020, Global Forest Resources Assessment 2020 Key Findings. https://www.fao.org/3/CA8753EN/CA8753EN.pdf
IPCC, 2022, Mitigation of Climate Change. Working Group III Contribution to the IPCC Sixth Assessment Report (AR6) Summary fo r Policymakers.
https://www.ipcc.ch/report/ar6/wg3/downloads/report/IPCC_AR6_WGIII_SPM.pdf
3 Global Traceability, EUDR – EU Deforestation-free Regulation What is the new deforestation-free regulation and what does it mean for businesses?,
https://www.global-traceability.com/eudr-eu-deforestation-free-regulation/
4 European Comission. Corporate sustainability reporting, https://finance.ec.europa.eu/capital-markets-union-and-financial-markets/companyreporting-and-auditing/company-reporting/corporate-sustainability-reporting_en
5 European Comimission, Corporate sustainability due diligence, Fostering sustainability in corporate governance and management systems.
https://commission.europa.eu/business-economy-euro/doing-business-eu/corporate-sustainability-due-diligence_enb
6 Carbon brief, 03 April 2023, Q&A: What does the EU’s new deforestation law mean for climate and biodiversity?, https://www.carbonbrief.org/qawhat-does-the-eus-new-deforestation-law-mean-for-climate-and-biodiversity/?utm_source&#61
7 FAQ – EU Deforestation Regulation, https://environment.ec.europa.eu/system/files/2023-06/FAQ%20-%20Deforestation%20Regulation_1.pdf
8 Ibid
9 Climate Bonds Initiative, Transition Finance for Transforming Companies https://www.climatebonds.net/transition-finance-transformingcompanies
10Wbcsd, Green House Protocol https://ghgprotocol.org/sites/default/files/standards_supporting/FAQ.pdf
11CDP, 2022, Scoping Out:
Tracking Nature Across the Supply Chain, Global Supply Chain Report 2022 https://cdn.cdp.net/cdpproduction/cms/reports/documents/000/006/918/original/CDP-Supply-Chain-Report-2022.pdf?1678870769
12 Granted Consultancy, What’s the difference between a supply chain and a value chain?, https://grantedltd.co.uk/funding-blog/whats-thedifference-between-a-supply-chain-and-a-value-chain/
13
CDP,
PolicyExplainer
ontheEU
Deforestation
Regulation(EUDR),
https://cdn.cdp.net/cdpproduction/comfy/cms/files/files/000/007/880/original/CDP_Policy_Explainer_Deforestation_Regulation.pdf
14 Climate Bonds Initiative, Transition Finance - Unlocking 1.5C, https://www.climatebonds.net/transition-finance-home
15 Climate Bonds Initiative, Agri-Food Transitions Programme, https://www.climatebonds.net/transition-finance/agri-food-transitions
16
Climate
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ClimateBonds
expandedStandard
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Scheme,https://www.climatebonds.net/files/files/certification/brochure-climate-bonds-new-standard-and-certification-scheme-05042023.pdf
Proposal for a regulation on deforestation-free products, https://environment.ec.europa.eu/publications/proposal-regulation-deforestation-freeproducts_en \Deforestation and forest degradation – reducing the impact of products placed on the EU market, Public consultation, 03 September 2020 - 10
December 2020, https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12137-Minimising-the-risk-of-deforestation-and-forestdegradation-associated-with-products-placed-on-the-EU-market/public-consultation_en
EuropeanCommission,
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KPMG, 13 February 2023 A high-level introduction to the EU Deforestation-Free Regulation. What it means for international supply chains,https://kpmg.com/be/en/home/insights/2023/02/sus-the-eu-anti-deforestation-regulation.html
Preferred by Nature, EUDR – Tackling deforestation and forest degradation in supply chains, https://preferredbynature.org/EUDR
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ClientEarth, December 2021, The proposed EU law on deforestation-free products, https://www.clientearth.org/media/sbjhtw3c/eu-deforestationproposal_main-elements-and-omissions_dec21.pdf
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Global Canopy, 25 May 2023, Financial institutions must act now to end deforestation finance. Here’s how,https://globalcanopy.org/insights/insight/financial-institutions-must-act-now-to-end-deforestation-finance-heres-how/
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2Prepared by Climate Bonds Initiative.

Lead Author: María Alejandra Pulido

Contributing Author: Rachel Hemingway© Published by Climate Bonds Initiative

September 2023 www.climatebonds.net

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