The countdown will soon start on the European Union’s latest regulations aimed at cutting commodity-linked deforestation out of supply chains entering or exiting the bloc. With over 18 months until the EU Deforestation Regulation (EUDR) comes into force, companies need to prepare for enhanced due diligence measures that will require them to trace commodities back to their origin – causing potential compliance headaches for food and beverage manufacturers.
Analysts have pointed to a risk of increased costs to meet compliance requirements, which could increase in proportion to the complexity of their supply chains, not to mention the time and expense required to find and vet new suppliers if current providers cannot comply.
Smaller players with limited resources may need to invest in traceability or data architecture that could be required to keep tabs on compliance. While large corporates are generally better prepared with a more detailed understanding of their supply chains, the size and complexity of their sourcing operations can also introduce further challenges. Working with diverse supply chains comprising many direct and indirect suppliers means that a huge amount of high-quality supply chain data will need to be identified and managed, in tandem with robust sourcing and procurement strategies that address upcoming due diligence requirements.
Is your supply chain prepared?
The good news for food manufacturers is that many commodity players have spent years evolving their approach to tackle deforestation in their supply chains, putting them in a strong position to navigate changing regulatory currents. The Agriculture Sector Roadmap to 1.5oC launched at COP27 marked a commitment from agri-commodity traders to halt deforestation and reduce emissions from land use change in their operations, in line with the Paris Agreement’s pathway 1.5oC.
Over the past decade or more, the palm oil industry has taken significant steps towards eradicating deforestation from its supply chains. While work remains, the industry-wide effort is paying off. Data from Trase Inisghts shows that deforestation linked to palm oil production in Indonesia, the world’s largest palm oil producer, is at its lowest level for a decade whilst palm oil production has continued to increase.
Golden Agri-Resources (GAR) supports the intention behind legislation which aims to ensure commodities historically linked to deforestation, including palm, are produced sustainably. For more than a decade, this has been the focus of GAR’s sustainability programme, starting with our Forest Conservation Policy established in 2011, and followed by the GAR Social and Environmental Policy in 2015, which extended our commitment to protecting high conservation value and high carbon stock forests to our third-party supply chain as well as our own operations.
By the end of 2022, we set aside nearly 80 thousand hectares of forests for conservation in our own plantations. This work doesn’t stop at the boundaries of our concessions. Outside of our plantations we have worked with local communities to conserve 43,000 hectares of forests and support our suppliers’ conservation efforts to protect another 120,000 hectares.
What does this mean for manufacturers?
The details of how the EUDR will be implemented are still being developed. Based on what we know today, there is a concern that the compliance burden will sit with producers to collect, analyse and share data linked to palm production on a per-shipment basis. The palm oil supply chain is notoriously fragmented and involves millions of smallholder farmers – more than 2.6 million in Indonesia alone. Collecting detailed information from these farmers is challenging and there is a real risk that to achieve EUDR compliance, buyers will simply cut smallholders out of their supply chain to make tracing their supply to origin a simpler task.
As more information on implementation emerges over the coming months, food and beverage manufacturers should start now to address how prepared they and their suppliers are for compliance in three core areas:
The first step is to understand and demonstrate where raw materials are coming from. Food and beverage manufacturers will need to ensure that suppliers can provide data that links ingredients back to the plot of land where they were produced. This requires engagement across the supply chain and particularly with smallholder farmers to ensure they can remain part of sustainable supply chains.
GAR’s early investment in traceability to plantation (TTP) since 2016 and our work with partners like Indonesian agri-tech provider Koltiva means we already have many geolocation points that can help to meet these requirements, for both our corporate estates and third-party suppliers. To date, we have achieved 98 percent TTP for our palm supply chain, which will support our ability to provide relevant data points on where our palm oil is sourced.
Questions remain about which formats and standards the EU will require for sharing this geolocation data. In Indonesia, and in other palm-producing countries, there are concerns about sharing GPS coordinates and mapping data to protect the privacy of farmers and landowners. Producers will need to look at solutions such as data anonymisation to help address these challenges.
The next step is to provide data points to assess deforestation risk, proving that the area where products were sourced was not deforested after the cut-off date of 31 December 2020. Efforts to map and understand supply chains through initiatives like TTP mean that companies like GAR can provide comprehensive monitoring of compliance with sustainability commitments, including the implementation of No Deforestation, No Peat and No Exploitation (NDPE) policies. This sits alongside proactive efforts to identify active deforestation risks through satellite monitoring services.
Where data isn’t available, palm producers will have to show that mitigation measures are in place. GAR has always taken a Do, then Share approach to creating sustainable supply chains. Applying new practices and policies in our own operations first before working with our suppliers to apply these methods to their own operations. This includes supporting hundreds of thousands of smallholders on their own sustainability journey.
Finally, companies must ensure that any commodities they use are compliant with all relevant applicable laws in force in the country of production. This ranges from ensuring producers have the legal right to cultivate crops on their land, to labour rights and environmental protection provisions.
The legality requirement is of particular concern for smallholders. The reality in palm oil and in other commodity small-scale farming supply chain is that smallholders do not operate a legal department to ensure up to date compliance with land rights, environmental and labour regulations. Most smallholders will have little or no capacity to provide companies in Europe with the necessary legal documentation.
Rather than excluding smallholders from supply chain and limiting access to supply bases, companies have a moral and commercial interest to invest and mitigate any smallholder risk. For example, customers of GAR are co-funding the aforementioned Sawit Terampil programme helping smallholders to achieve legality and certification.
The last hurdle for commodity producers and traders, once due diligence data points have been identified and verified, is how to share this data with the companies using their products. The goal is to provide due diligence data at the touch of a button, to streamline compliance for producers with multiple inputs and suppliers. GAR is working with digital platform experts to build the necessary technology for companies to access high-quality data points at a shipment level.
Ian Suwarganda, Head of Policy & Partnerships, Golden Agri-Resources