Due diligence on forest risk commodities: Defra’s consultation

Sancroft Team
By Sancroft Team

By Robyn Lockyer, former Senior Analyst at Sancroft.

The world’s treatment of its forests has been at the forefront of international news for some time now. In addition to the wildfires that have ravaged Australia and California, over 5,000 square miles of the Brazilian Amazon has been burned in 2020 so far, with beef companies taking much of the blame. This has prompted swathes of companies including Vans, Timberland and The North Face to stop sourcing leather from Brazil in protest of its deforestation practices.

Many of the products bought in the UK use ingredients that have been produced in countries where there is a high risk of deforestation. In fact, the most recent assessment by Global Canopy’s Forest 500 (2019) found that 21% of the most influential companies in forest risk supply chains operating in Europe, lacked a policy to address deforestation risks.

Last month, the UK Government launched a consultation on a proposal to introduce a due diligence requirement for companies that may be contributing to deforestation within their supply chains. The proposal targets forest-risk commodities – those that can cause wide-scale deforestation – including beef, cocoa, leather, palm oil, rubber and soya.

This move follows increasing scrutiny from regulators, consumers and investors on the lack of corporate action to tackle deforestation in supply chains. Investors are such action this as critical to securing long term returns, as witnessed in June, with more than two dozen financial institutions expressing their concern to the Brazilian government over continued failures to mitigate severe environmental destruction in the country.

Why now?

This issue is not a new one for businesses, however the timing of this consultation stems from a report published in March this year by the Global Resource Initiative Taskforce. The report proposed 14 key recommendations to reduce the effects of UK supply chains on the global climate and environment, one of the most crucial being the introduction of a mandatory due diligence requirement.

The small print:

  • Under the proposals, it would be illegal for businesses to use forest risk commodities that have not been produced in accordance with relevant local laws – defined as those that protect natural forests and ecosystems from being converted in to agricultural land – thereby obliging businesses to conduct due diligence to show that they have taken proportionate action to ensure this is the case.
  • The consultation covers six key commodities, although it remains unclear whether a more exhaustive list will exist in further iterations.
  • The proposals in their current form only apply to “large businesses” that produce or trade in the UK. The threshold turnover and employee number for businesses falling within scope of the proposed legislation is yet to be determined. The aim is to regulate those businesses that are most likely to send positive signals to producers through their influence, whilst reducing the reporting burden on smaller businesses.
  • In line with existing obligations around Streamlined Energy and Carbon Reporting (SECR), this proposal seeks to align disclosures with existing international reporting frameworks, such as those recommended by the Taskforce on Climate-Related Financial Disclosures (TCFD).

What does this mean for business?

While there are parallels with the Modern Slavery Act 2015, the underlying obligations would arguably go further in that companies would be required to have a robust system of due diligence in place to show that they have taken proportionate action. The proposal would also enable the Government to impose fines against businesses that continue to use forest risk commodities that have been produced illegally, or without a robust due diligence system in place.

Companies that don’t have a good grasp of their supply chains will need to act quickly to stay ahead of the proposed legislation. Ultimately, they need to know where their raw materials come from and what the associated risks are. This requires strengthening engagement with suppliers beyond tier one, enhancing monitoring of the higher risk suppliers and reporting to ensure full transparency. Companies may also be asking tougher questions of countries where weak local legislation means that forests are legally cleared under local laws.

As ever, the devil will lie in the detail of any new legislation. The consultation is currently seeking views on the required level of due diligence and scrutiny of local laws, how local laws would be analysed by the UK Government, and reporting format.

The initial consultation period closes on 5th October 2020, with further iterations expected on the exact details of the proposed framework in forthcoming months. For more information, please email hello@sancroft.com.