The European Union Deforestation Regulation (EUDR) is set to come into effect by the end of this year, signaling a significant shift in regulatory requirements for businesses operating within the EU. The legislation, aimed at tackling deforestation and forest degradation linked to commodity production, has garnered mixed reactions. Critics have raised concerns regarding the compliance costs and administrative burdens that the regulation may impose on industries reliant on commodities.
A recent report from consultancy firm Profundo delves into the anticipated costs associated with EUDR compliance and assesses its potential impact on consumer prices for key commodities. Understanding these dynamics is essential for businesses preparing to navigate the new regulatory landscape.
Understanding EUDR Compliance Requirements
Compliance with the EUDR entails a multifaceted process that requires companies to gather comprehensive information, documents, and data from their suppliers regarding the commodities in question. This includes verifying the origins of these commodities to ensure they were produced on land that is not associated with deforestation or forest degradation. Furthermore, it is crucial for companies to confirm that their suppliers adhered to local laws during the production process. For products sourced from multiple geolocations, each location’s compliance must be thoroughly verified.
Once this data is collected, businesses may need to implement risk mitigation strategies to address any potential compliance gaps. This process is not only resource-intensive but also necessitates a robust framework for ongoing monitoring and verification.
Estimating Compliance Costs
The Profundo report estimates the financial implications of EUDR compliance by consulting a variety of sources, including geolocation data companies, projections from the European Commission, and prior studies on due diligence conducted by organizations such as WWF and Chain Reaction Research. By analyzing data from twelve companies of differing sizes and revenue streams, the report provides a predictive model for compliance costs based on the volume of imports reported by these businesses.
The findings suggest that companies could incur compliance costs averaging 0.1% of their revenues, with more significant impacts felt in areas such as operating profit (1.45%), net profit (1.89%), employee costs (4.33%), and top management remuneration (58.77%). Notably, small and medium-sized enterprises (SMEs) may face higher relative costs, spending an average of 0.17% of revenues compared to 0.06% for larger firms. Conversely, when considering operating and net profit percentages, SMEs may actually fare better, with lower compliance costs relative to their profits.
Gerard Rijk, the report’s author, highlights that many smaller companies maintain relatively healthy profit margins, which may alleviate some of the pressure from compliance costs. For instance, Barry Callebaut, a major player in the chocolate industry, is projected to spend about 0.04% of its revenues annually on compliance, with total annual costs reaching approximately 0.05%. Similarly, Bunge, another large corporation, anticipates ongoing costs of 0.03% of its revenues.
In contrast, smaller companies like Brazilian meat importer Frostmeat face a setup cost of 0.01% of revenues, but their ongoing costs are estimated to reach 0.253%, illustrating the varying financial burden across different business sizes.
It is important to note that the collection of geolocation data for commodities can contribute to ongoing costs rather than being classified solely as setup expenses, as supplier relationships may change over time. Purchasing certified commodities, such as RSPO-certified palm oil, may provide opportunities for cost savings, provided that the data from certifiers meets the European Commission’s standards. Rijk emphasizes that compliance may enhance a company’s reputation, potentially supporting its share price in the long run.
Implications for Consumers
As companies grapple with increased compliance costs, the question arises: how will these expenses affect consumers? Historically, additional costs incurred by businesses are often passed on to consumers through higher prices. While compliance with the EUDR may lead to price increases for various commodities, the report suggests that the overall impact may not be as significant as some fear.
To illustrate this, the report assesses the proportion of EUDR-compliant commodities within final products. The findings indicate minimal price increases across various commodities: cocoa could raise chocolate prices by 0.007%, coffee by 0.018%, and palm oil by 0.006%. Additionally, beef prices could rise by 0.066%, while soy-fed cow milk may see an increase of just 0.001%.
In conclusion, while the EUDR represents a significant regulatory development with potential financial implications, the actual impact on consumer prices may be relatively modest. Businesses will need to strategically navigate compliance requirements to maintain their profitability while contributing to sustainable practices that align with the EU’s environmental goals.
