By promoting the consumption of ‘deforestation-free’ products and reducing the EU’s impact on global deforestation and forest degradation, the new Regulation (EU) 2023/1115 on deforestation-free products is expected to bring down greenhouse gas emissions and biodiversity loss.

On June 29, 2023, the EUDR regulation entered into force. Although the Regulation was published in the official journal of the European Union on June 9, 2023, the applicability of certain articles listed in paragraph 2 of Article 38 will enter into application on December 30, 2024 amounting to an 18-month transition period, and on June 30, 2025, amounting to a 24-month transition period, for micro- and small enterprises who will have some specific provisions (These dates have now been extended by one year to December 30, 2025 and June 30, 2026 respectively). The Regulation is part of a broader plan of action to tackle deforestation and forest degradation, first outlined in the 2019 Commission Communication on stepping up EU action to protect and restore the world’s forests. This commitment was later confirmed by the European Green Deal, the EU Biodiversity Strategy for 2030 and the Farm to Fork Strategy. The Regulation on deforestation-free products repeals the earlier EU Timber Regulation.

The main driver of deforestation is the expansion of agricultural land that is linked to the production of commodities like cattle, wood, cocoa, soy, palm oil, coffee, rubber, and some of their derived products, such as leather, chocolate, tyres, or furniture. As a major economy and consumer of these commodities linked to deforestation and forest degradation, the EU has taken the responsibility for this problem and now wants to lead the way to solving it. Under the Regulation, any operator or trader who places these commodities on the EU market, or exports from it, must be able to prove that the products do not originate from recently deforested land or have contributed to forest degradation. Regulation guidelines have been created by the European Commission to provide information to national authorities, EU operators and other stakeholders for its implementation.

Broadly, the regulation aims to:

• Reduce the carbon emissions caused by EU consumption and production of the relevant commodities by at least 32 MMT (million metric tonnes) a year

• Address all deforestation, driven by agricultural expansion to produce the commodities in the scope of the regulation, as well as the forest degradation

• Avoid the listed products that Europeans buy, use and consume which contribute to deforestation and forest degradation in the EU and globally.

Scope of Regulation

The new Regulation gets applied as and when the listed products included in the scope of the Regulation are placed on the EU market or exported from the EU, irrespective of their quantity. The seven listed products and their derivatives have been chosen on the basis of a thorough Impact Assessment study. The Commission has also proposed a progressive scope of the listed commodities to be regulated, reviewed and updated regularly on the basis of new data that would indicate the changes in deforestation patterns. Evenly applicable to the products from outside as well as within from the EU, the Regulation applies on exports as well as imports of the listed commodities.

Due Diligence

Operators must carry out Due Diligence to ensure that the products come from the land that was not deforested after December 31, 2020, and also comply with the laws in the country where they were produced. Operators must assess the risk associated in situation of product not complying with the rules and adopt the risk mitigation procedures. Due diligence statements must be submitted electronically in the deforestation registry created by the European Commission and be checked by member states’ authorities. Operators exporting relevant products will be required to include the reference number of the due diligence statement in their export declaration. As a general rule, operators and non-SME traders will have to set up and maintain a Due Diligence System consisting of three steps:

• Firstly, collect the information pertaining to the commodity or product intended to be placed on the market or exported, including respective quantity, CN code, supplier, country of production, evidence of legal harvest, and the geographic coordinates of the plots of land where the relevant commodity was produced, and put in the due diligence statement to be submitted via the Information System. Operator must refrain from dealing in the products whose information cannot be made available or face potential sanctions.

• Secondly, the operators must feed the gathered information into the risk assessment pillar of Due Diligence Systems to verify and evaluate the risk of non-compliant products entering their supply chain. They need to demonstrate how the information gathered was checked against the risk assessment criteria and how the risk was determined.

• Thirdly, adequate and proportionate mitigation measures to be taken to ensure that the risk becomes negligible in case more than a negligible risk of non-compliance is found in step two. These measures need to be documented too.

Country Benchmarking

The EUDR requires that countries be classified into three categories: high, standard, and low risk, through a Commission-operated benchmarking system, based on the level of risk of producing commodities that are not deforestation-free in those countries. In this regard, the EU and its member states are engaging with partner countries, as well as consumer and producer countries, to jointly address deforestation and forest degradation through a global Team Europe Initiative (TEI) on Deforestation-free Value Chains. TEI will support countries in addressing deforestation and forest degradation. The Commission has already begun participating in projects to disseminate information, raise awareness, and address technical questions through workshops for smallholders in the most affected third countries (countries outside the EU). The TEI Hub will also work closely with the upcoming EU Helpdesk on the Corporate Sustainability Due Diligence Directive (CSDDD), particularly regarding agricultural value chains and smallholders, who will be affected by both the EUDR and CSDDD.

What EUDR Means for Businesses

The EUDR brings significant implications for businesses dealing with certain products. To start with, they are now required to conduct even more extensive due diligence on their supply chains. By the end of 2024, the new regulation will require large companies, trading in seven listed commodities and products derived from them, to prove that their goods or products do not originate from recently deforested areas or contribute to forest degradation. Local customs authorities across EU states have already initiated flagging companies’ responsibility to comply with the EUDR’s far-reaching requirements. Regulatory scrutiny will become more intense and large volumes of data on products and supplier will be needed to comply.

This means that the organisations should immediately prioritise understanding the legal obligations of the EUDR, define a compliance framework, implement a centralised data-gathering capability and ensure that key processes are in place with clearly defined roles and responsibilities. Any failure to this effect could result in punitive fines and reputational damage. The Regulation will have effects on both large companies and SMEs, especially in their sourcing and traceability-ensuring supply chains.

Sourcing

As countries risk levels of deforestation are determined by the EU, companies sourcing from those locations may be forced to move their sourcing operations to ones that are lower-risk to avoid fines and seizure of non[1]complying goods. Otherwise it will burden their administration throughout their supply chains. The brands and retailers of footwear, leather goods and accessories that produce, buy or retail finished products containing leather, not processed by the brand or retailer, are not directly impacted but with the entire supply chain affected, they are likely to see disruption to where they source from. The EUDR is going to set a bar by which even the global suppliers will need to align their sourcing practices.

Supply Chain & Traceability

The supply chains of the commodities targeted by this new regulation in some sectors like textile and fashion are highly complex, because they are globalised, operated by multiple players and often opaque. Therefore, a major shakeup in supply chain and traceability is expected with full implementation of EUDR. The regulation mandates that the companies outside the EU must supply additional and more detailed data pertaining to entire value chain of the product. This detailed traceability requirements present companies with the challenge of introducing traceability systems in areas where traceability is not a common practice yet, such as the leather industry. To ensure a successful transition to deforestation[1]free supply chains, the EU continues to work with partner countries and companies. The European Commission organises frequent meetings with EU member states, selected interested parties including trade and business associations as well as NGOs, and third countries to present and discuss the main strands of work and identify best practices.

In industrial product terms, the textile, apparel, leather, rubber and wood are sure to feel EUDR impact. Let us see how and to what extent.

Textiles & Apparel

The connection between forests and fashion is not widely recognised, but it is critical. Most people are aware of the link between forests and paper, but few realise that the forests are also deeply connected to the clothes in their closets. Unfortunately, as demand grows, so does the pressure on forests, leading to the destruction of vital ecosystems that play a key role in carbon confiscation and the preservation of biodiversity. It is a well-known fact that the loss of these forests accelerates climate change and depletes habitats for endangered species. For instance, at the current rate of deforestation, scientists warn that 55 per cent of the Amazon rainforest could be lost or severely damaged by 2030.

From textile perspective, cotton farming is a significant driver of deforestation in many geographies such as Cerrado region in Brazil, which is one of the South American nation’s major agricultural areas. The expansion of cotton cultivation has contributed to severe deforestation and ecosystem degradation there. According to the FAO (Food & Agriculture Organisation), the global cotton industry, valued at over $50 billion annually, produces more than 25 MT each year. However, despite their significant environmental impact, cotton and MMCF (Man Made Cellulose Fibres) such as viscose and rayon – integral to the production of both fast fashion and luxury garments, are not currently included under the EUDR. MMCFs, such as viscose, rayon, modal, and lyocell, although derived from renewable resources like wood, have a significant environmental footprint due to their production processes. More than 300 million trees are logged every year and turned into cellulosic fabrics, contributing to deforestation and threatening biodiversity. Forests are being cleared to create fabrics for next season’s fashion collection.

All these fibres originating from plants, particularly trees, make them highly dependent on forest resources thereby contributing to large-scale deforestation. However, all these fibres share a common problem which is nothing but the sourcing of raw materials. In that sense, EUDR may show its effect on them once implemented fully.

As of now the EUDR covers, under its scope, a number of raw materials and products that are important for the textile sector. The listed products that are relevant for the textile industry include:

• Ex 4107 Leather of cattle which is further prepared after tanning or crusting. This may also include parchment - dressed leather, without hair on, whether or not split, other than leather of heading 4114

• 4001 Natural rubber, balata, gutta[1]percha, guayule, chicle and similar natural gums, in primary forms or in plates, sheets or strip

• Pulp, paper and printed products. While the packaging of a product is not in scope when used exclusively as packing material to support, protect or carry another product placed on the market, the purchase of packaging material stand exposed to the supply chain disruption and increased costs.

Leather, Rubber & Wood

Although the EUDR will have a significant impact on the leather segment, particularly on the tanneries, the brands and retailers of footwear, leather goods, and accessories that produce, purchase, or retail finished products containing leather (not processed by the brand or retailer) are not directly affected. However, since the entire supply chain is impacted, disruptions in their supplies are likely to be the major spoiler. Brands will not be affected initially but later on because, from 2025, brands will need to measure and collect information on the environmental and social compliance of their supply chains. The traceability of derived and processed leather products is often lost at slaughterhouse level, making it virtually impossible for the last players in the chain, using the hides and skins, to trace them back to the various places where the animals were born and reared. This could be a major challenge.

The $250 billion (2023) global leather goods market is a significant focus of the EUDR, with the EU being a major importer of leather products. A significant part of its leather imports is sourced from Brazil, where cattle ranching accounts for up to 80 per cent of deforestation in the Amazon rainforest (as per WWF). Furthermore, the European leather market is deeply intertwined with high-end fashion and luxury goods. These segments heavily rely on genuine leather as they exhibit a strong tradition of craftsmanship and the prominence of luxury brands. Complying with the EUDR, these brands are required to trace the origin of their leather and ensure it is deforestation-free, fundamentally challenging existing supply chain practices. Brands operating in Europe must now ensure that their leather is not only of the highest quality but also compliant with the new sustainability standards. This is particularly important as consumer demand in Europe increasingly shifts towards products that are ethically sourced and environmentally friendly, making compliance with the EUDR both a regulatory necessity and a competitive advantage. In such a scenario, companies in the European market will need to balance the cost of sustainable leather sourcing with consumer expectations for quality and environmental responsibility.

With its usage in production of footwear, accessories as well as in technical coated textiles, the natural rubber market is also under scrutiny. The rubber has often been linked to deforestation in tropical regions. Rightly so, the EUDR requires fashion companies to verify that their rubber sourcing does not contribute to deforestation, potentially driving significant changes in material sourcing and production practices. When it comes to wood, the sector will feel the repercussions of the impact to the packaging industry, especially paper based packaging.

Under this regulation, the burden of demonstrating their product as well as its value chain’s deforestation-free status will be on companies only.

Input Costs and Consumer Pricing

The EUDR is expected to widen the gap between big and small companies as larger companies are better placed to shoulder the additional regulatory and financial burden. This seems inevitable as companies will be required to incur additional expenses in ensuring EUDR compliance. Take for an instance, the companies will be expected to put GPS tracking into place to meet the unprecedented levels of traceability and transparency of EUDR. In its present form, EUDR does not directly impact the finished products, but they do not stand immune to supply chain disruption and increased product costs due to costlier raw materials either. This may also translate into an impact on the prices paid by consumers. This will turn out to be a case of ‘greenflation’ – price increase caused by the sustainability and climate change mitigation efforts. In the context of EU legislation, the producers outside the EU and companies inside the EU importing goods will have to add extra operational costs which might be passed onto the consumer.

Still, the exact impact on consumers will depend on a variety of factors, including how companies choose to respond to the regulation, the extent to which the regulation is enforced, and how much assistance EU member states are willing to give to supplier countries to help them align with the new rules.

What Fashion Companies need to do

EUDR presents an opportunity for brands and retailers to eliminate risk from their forest product supply chains and to shift towards lower-risk and lower-impact next-gen alternatives for rubber, leather and paper-based packaging. Although MMCF textiles are not yet covered under the regulation, many brands are already working to integrate MMCF textiles into their EUDR systems given the anticipation that they will be formally covered under the regulation sooner or later. EUDR will motivate brands and producers to embrace low-carbon next-gen alternatives, such as packaging derived from agricultural residues and viscose textiles derived from waste textiles. To establish their credibility in traceability and demonstrate that their products are not linked to illegal deforestation, fashion companies will need to collect granular data that reaches back to the beginning of the supply chain. This could include geospatial analysis of farms in their supply chain to prove no deforestation occurred after December 2020. This would require product-level traceability to gather information on volume reconciliation and product segregation. There is also an understanding that the regulation falls within the brand’s area of responsibility under three other directives or regulations – Corporate Sustainability Reporting Directive (CSRD), Corporate Sustainability Due Diligence Directive CSDDD and Ecodesign for Sustainable Product Regulation (ESPR).

Opportunities

EUDR comes with immense opportunities for brands that have already invested in sustainable practices. As the consumer demand for environmentally responsible products increase, the global sustainable fashion market is expected to grow in the coming years. The brands which can demonstrate compliance with EUDR are likely to gain competitive edge in this foreseeable market, appealing to the growing market of environmentally conscious consumers. The compliance to EUDR will also drive innovation in the fashion industry, wherein brands may explore lab-grown or alternative materials or develop new technologies to enhance supply chain transparency and sustainability. Last but not the least, brands can enhance their reputation by complying with the path-breaking EUDR. This will lead to increased consumer trust and potentially open up new markets for them. Strict adherence to sustainability standards of the regulation can increase the market share of adhering brands riding on the ‘thumbs-up’ given by consumers who are discerning about the environmental impact of their purchases.

Challenges

At the same time, EUDR may pose few formidable challenges for the fashion industry, especially in terms of compliance and the related costs. Fashion brands with complex and multi-tiered supply chains may face unique challenges as they involve a vast network of suppliers. Implementing the traceability as required by EUDR may either slow down productivity or pose operational difficulties during transition phase. The outcome of structural changes is bound to step up operational costs, requiring significant investments in supply chain management technologies. This may further stress the resources of the companies that already operate on tight margins. The production costs may also increase in the wake of sustainable sourcing under EUDR. In fact, sustainable leather is already more expensive than conventional leather due to ethical sourcing, environmental considerations and involved certification processes that add up to the total production costs. Add to that, for the companies investing in technologies to achieve desired levels of traceability and certification, the overall cost factor is going to be an extra burden. Consequently, these expenses may ultimately be passed on to the consumers, thereby denting the product affordability. The defaulters will invite legal action and risk their reputation, if found non-compliant under EUDR. Fines can reach up to 4 per cent of a company’s annual global turnover in the EU and products could additionally be seized.

What’s Ahead

The EUDR is a catalyst for meaningful change – and along with other circular economy legislation and the Extended Producer Responsibility (EPR), is motivating businesses to invest in transparent, traceable, low-carbon sourcing and to support smallholders in transitioning to sustainable methods. The textile and apparel sectors stand at the forefront of this movement with the potential to redefine industry practices and contribute significantly to global climate goals. EUDR compliance is a powerful opportunity for brands to champion low-impact sourcing, improve their competitive edge, and contribute to the preservation of our planet’s forests and biodiversity. The competitive, social and planetary benefits will be immense.