September 24, 2024

EUDR: Risk Assessment

The European Union Deforestation Regulation (EUDR) mandates companies to perform comprehensive risk assessments to identify and address deforestation risks within their supply chains. Given the complexity of global supply chains, this task can be challenging. In this article, we explore the requirements of the EUDR and provide guidance on how companies can effectively carry out risk assessments to ensure compliance.

Introduction to EUDR Risk Assessments

Overview of EUDR

The EUDR is a significant legislative initiative aimed at reducing deforestation and forest degradation linked to EU consumption. By imposing strict requirements on companies importing commodities associated with deforestation, the EUDR ensures that products entering the EU market do not contribute to global forest loss. This regulation aligns with the EU’s commitment to environmental sustainability and climate change mitigation.The EUDR covers a range of commodities, including:

Palm oil
Soy
Coffee
Cocoa
Timber
Cattle products

It also extends to derivative products such as chocolate, leather, and furniture. Entities involved in the production, import, or trade of these commodities within the EU must ensure compliance with the regulation.

Importance of Compliance

A core requirement of the EUDR is for businesses trading in the referenced commodities to perform a risk assessment. The aim is to identify any potential risk of products linked to deforestation entering their supply chain. Non-compliance can result in significant financial penalties and reputational damage.

Key EUDR Risk Factors

When assessing their products relevant to EUDR companies have to consider a range of different factors. From the physical locations where the commodities are grown, all the way through the supply chain and into finished products. The table below references the 14 areas detailed within EUDR which a risk assessment must be carried out against.

Topic	Description
Risk assignment	Evaluate and assign risk to the country or region of production.
Forest presence	Consider whether forests exist in the country or region of production.
Indigenous peoples	Identify whether indigenous peoples are present in the production area.
Consultation with indigenous peoples	Ensure good faith consultation and cooperation with indigenous peoples.
Indigenous land claims	Consider claims by indigenous peoples based on verified information regarding land ownership or use for production.
Deforestation risk	Assess the prevalence of deforestation or forest degradation in the production area.
Documentation reliability	Verify the source, reliability, and connection of the information to other documentation.
Country concerns	Consider risks such as corruption, document falsification, human rights violations, armed conflict, or international sanctions.
Supply chain complexity	Consider challenges in linking products to specific land plots and stages of processing.
Regulation circumvention risk	Assess the risk of mixing products from areas with deforestation or unknown origin.
Commission expert meetings	Review conclusions from Commission expert group meetings relevant to implementation.
Non-compliance history	Investigate past non-compliance of operators or traders in the supply chain.
Risk of non-compliance	Evaluate any information suggesting the products might be non-compliant.
Third-party compliance	Review additional compliance information from certification schemes recognised by the Commission.

These various topics can be generally grouped into deforestation risks, supply chain complexity risks and Geographic/Sectoral risks.

Deforestation-related risks

The main risk EUDR is designed to manage is of course deforestation. When performing a risk assessment, this is looking at the specific plots of land where commodities are supplier from. Suppliers will need to provide GeoJSON files which describe plots of land. These files are electronic coordinates detailing the boundaries of the plot and are usually produced using technology tools to draw the relevant area on a map.

With the locations identified, the assessment should be looking at key points of information, mainly, has the forested land been degraded in any way since 2020, is the information provided trustworthy and are there causes for concern regarding the practices on or around the area identified. For example, if deforestation has happened in all the surrounding areas, this would be a red flag that the area within scope may be at risk of deforestation.

Supply Chain Complexity

A major cause of concern for companies is within the complexity of their supply chain. Knowing the land source of commodities is useful, but there is then a chain of custody for the commodities to pass through which significantly increases the risk area. Most companies deal with their tier 1 suppliers and rely on them and their partners performing suitable due diligence. With EUDR, the operator must take full responsibility for the risk assessment within their supply chain.Key areas to consider when performing the risk assessment is the quality of controls in place with your suppliers and their due diligence processes. This will help to support an understanding of the trustworthiness of information passed through the supply chain. It is also critical to understand the chain of custody the commodities pass through. In many cases the commodities may pass through multiple companies and countries, adding complexity at each point.The risk of mixing of commodities needs to be assesses. It is rare that a commodity from a single plot of land is passed in isolation through a supply chain. It is typical that harvests from many different plots are combined for processing, increasing the risk of goods from deforested land being mixed with those from non-deforested land.To ensure compliance with EUDR, operators must assess the risk of contamination of the goods they purchase. This will mean that companies will need to build relationships beyond tier 1 suppliers, and trust their supply chain sufficiently to manage the processes and controls to manage these commodities seperately from others.

Geographic and Sectoral Risks

The countries involved in specific commodities introduce various risk profiles. Equally, different sectors employ different practices, which contribute to the risk profile. From a country perspective, the EU has committed to providing a risk assessment for different countries, but at the time of writing this has yet to be published. Once published, this is intended to categorise countries into high, medium, and low risks. This will be based on different inputs such as the laws which are in force, the focus and levels of regulation, and the levels of corruption prevalent within the country.

These assessments will be helpful for providing a consistent perspective on country level risks, also supporting the assessment of supply chains as products pass through various locations.

Conducting a Comprehensive EUDR Risk Assessment

The EU Commission is expected to publish implementation guidance at some point in the future, which will help to be clear about the specifics in relation to adopting EUDR. In the mean time, companies are reliant on interpretation of the regulation text, which leaves significant margin for error.

What we’ve seen from work with clients is that larger operators are taking steps to implement due diligence processes which align with the intent of the regulation. This requires completing three main activities to conduct a risk assessment.

1. Supply Chain Engagement & Mapping

To perform a risk assessment you will be heavily reliant on your suppliers providing you with information which they are unlikely to provide you with today. You will need to get information about their own operations and about the supply chain behind their business, all the way back to the land where the commodities originate from. This is potentially a significant burden on them, so you should be prepared to support with knowledge building, and where necessary, investment to help others.We’ve found it helpful to start the risk assessment with mapping out your supply chain. This helps to build a complete picture to assess the risk against. A supply chain map will also highlight where you have visibility gaps.You will need to define the questions you need to ask your suppliers to ensure you obtain all the information you need as efficiently as possible. Engagement typically takes the form of surveys, but we find it’s a great practice to engage suppliers broadly in discussions to explain the regulations, your obligations and the help you need from them, before sending out the surveys. Providing support in how to answer the questions is also valuable, since many suppliers will not have access to the expertise required to provide detailed answers.The key areas you will need to perform an assessment about with your suppliers are their commitments to adhere to EUDR, their QA processes, their management of chain of custody and information on the sources of commodities and the chain of intermediaries from the land where they are sourced. All of these pieces of information will then support a risks based assessment.

2. Information Analysis

Analysing the information collected from the supply chain should be done across multiple dimensions. The intent is to identify where risks exist in the supply chain and against which elements. Consequently, considering risks from perspectives such as suppliers, producers, countries, commodities and products provides a multi-dimensional analysis.

A key first step is to define the risk criteria to use against which to assess the information. Setting thresholds for the different categories of information will help to filter elements which have a low risk profile from those which need further investigation. These will vary from assigning broad categories for countries based on the EU country benchmarking (once published), to specific key risks areas relevant to the commodities.

The next step is to map suppliers and the commodities they provide to your own products. This helps to extend the supply chain map into the company, thereby establishing the connections to identify risks through. For some companies, this may be a simple task, but for others, allocation methods across large portfolios of product ranges may make this challenging.

One of the more challenging activities is to assess the risks against specific plots of land the commodities are sourced from. Using geospatial information combined with satellite imagery from well managed sources is required to assess what, if any, degradation of forestry has occurred on each site. This is best achieved through using bespoke technology tools, a broad selection of which are now available commercially on the market.

Collating all the information provided from suppliers into a repository and assessing this against your risk criteria will enable a heat map of risks to manage in the next stage.

3. Risk Management

The application of EUDR is absolute, meaning no products which have a risk of coming from deforestation are allowed to be placed into or exported from the market. This means any risks which are identified in the risk assessment must be addressed.

In many cases, this will require further information to clarify some aspect of what suppliers have provided. An example we’ve commonly seen is a false positive for plots of land for deforestation. This is often due to use of shade trees which have been pruned, or satellite images which are assessed using technology incorrectly identifying deforestation.

Other cases may need interventions. Examples we have come across are where a suppliers quality assurance procedures are not sufficient, or their chain of custody controls do not meet stringent criteria to protect against mixing. These can all be managed by sharing the results of the assessment with suppliers and working with them to make adjustments and corrections until the risk is managed.

Periodic reviews and interim assessments are helpful between the prescribed annual update of the risk assessment. Whilst this adds an additional resource requirement, it assures your supply chain and other stakeholders the significance of ensuring compliance with EUDR to your businesses.

Where risks are identified which cannot be mitigated, then the business must make a decision to eliminate this point from the supply of goods to the EU until the matter has been resolved. The financial and reputational risks to the business are too significant to allow

Challenges in EUDR Risk Assessments

All of the commodities in scope of EUDR are part of significantly complex global supply chains. Introducing such a detailed regulation will inevitably create challenges for everyone within the value chain. Larger companies have access to much greater resources and are therefore managing the implementation more easily. For smaller actors in the supply chain, the burden can be significant and overwhelming. We are seeing responsible businesses work collaboratively with suppliers to support them in building knowledge, capability and infrastructure to make the implementation as friction free as possible.

The lack of clarity from the EU Commission is also hindering implementation. A number of items of information have been promised, but are yet to be released. Companies are now hesitating to progress implementation due to the risk of having to double-back to rework aspects.

At the heart of EUDR is an element of trust within supply chains. Inevitably, as you work backwards through supply chains, in many cases back to smallholders, any small discrepancies can have a significant impact on risk assessments, causing significant work to resolve risks.

If companies push too much responsibility to meet EUDR requirements back through the supply chain, they will eventually force actors out of the market. The risks to smallholders in particular needs to be managed to prevent social impacts which need to be avoided.

How Jordisk Can Help

At Jordisk, we specialise in performing comprehensive EUDR risk assessments to help companies navigate the complexities of the regulation. Our expertise enables you to identify and address deforestation risks within your supply chain effectively.

Our services include:

Comprehensive Risk Assessments: We conduct detailed evaluations of your supply chain to pinpoint potential deforestation risks, ensuring compliance with all EUDR requirements.

Supply Chain Mapping: Our team assists in mapping your entire supply chain, providing visibility into every stage from raw material sourcing to finished products.

Supplier Engagement: We facilitate effective communication with your suppliers to gather necessary information and ensure they understand and meet EUDR obligations.

Risk Mitigation Strategies: Based on our assessments, we develop actionable plans to mitigate identified risks, helping you implement solutions that enhance compliance.

Training and Consultation: We offer training sessions and ongoing consultations to educate your team about EUDR requirements and best practices in risk management.

Ongoing Support: Recognising that compliance is an ongoing process, we provide continual support to update your risk assessments and adapt to any changes in regulations.

By partnering with Jordisk, you can confidently address the challenges of EUDR compliance, protect your business from potential risks, and contribute to global efforts to combat deforestation.