EU deforestation law has supply chains on alert - Moody's

European Union’s Deforestation Regulation opens up new world of risk for supply chain operations, says Moody's

New EU deforestation legislation introduces a whole new layer of risk to European supply chains, risk assessment specialist Moody’s says.

The European Union’s (EU) new Deforestation Regulation came into force on 29 June, although its main stipulations will not apply until 30 December 2024.

The Regulation is aimed at minimising the EU’s contribution to global deforestation, and also at reducing its contribution to greenhouse gas emissions and global biodiversity loss.

It covers seven commodities, representing the largest share of EU-driven deforestation: 

  • Palm oil
  • Soya
  • Wood
  • Cocoa
  • Coffee
  • Cattle
  • Rubber

The Deforestation Regulation affects operators who export such products from the EU, or supply chain operatives who make them available on the EU market.

Penalties for failure to comply with the Regulation will result in fines that are 4% of the operator's or trader's total annual EU-wide turnover in the preceding financial year.

Moody’s says the Regulation will increase operating costs not only for companies globally that produce any of the affected products, but also companies that are involved in the commodities’ supply chains. 

EU deforestation law affects supply chain risk

“Reputational and opportunity costs could also become significant for companies through required adjustments to supply chains and the greater scrutiny by consumers, investors and regulators,” it says.

The findings come from a report published by by Moody’s Investors Service, which analyses the credit implications of the Deforestation Regulation. 

Credit exposure, it says, is “both direct and indirect”. 

The report adds: “The materiality of the credit impact is likely to depend on factors such as the company's position in the supply chain. Commodity producers will bear most of the compliance obligations.

“Another factor is a company's ability to switch to other products or suppliers, without significantly reducing its revenue or affecting its operations. 

“Supply chains are likely to be the main source of exposure for many sectors but disclosure from suppliers can be limited and geographical details about the agricultural land of origin can be difficult to pinpoint.”

It adds that companies operating in emerging markets will be most affected. 

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