EU passes new deforestation law

What is the new legislation?

The European Parliament has passed a new landmark law to fight climate change and biodiversity loss.[1] The new law will require companies which are either importing or exporting goods to and from the EU respectively to provide evidence that they do not produce certain goods on land that has been deforested since 31^st of December 2020.[2] The new law covers the following goods: “cattle, cocoa, coffee, palm-oil, soya and wood, including products that contain, have been fed with or have been made using these commodities (such as leather, chocolate and furniture)”.[3]

Between 2008 – 2017 the share of EU-embodied deforestation due to eight commodities is exemplified below. Palm oil and Soya is responsible for over two-thirds of the deforestation which the EU is responsible for.

Risk-based controls will be put in place within 18 months of the law coming into effect. These controls will be based on the level of risk of products within the specific country being produced on deforested land since 2020. There will be penalties for non-compliance, with a maximum fine of at least 4% of the total annual turnover in the EU of the non-compliant operator or trader.[4]

Why is there a need for this legislation in the EU?

• Climate change

Land use change, principally deforestation, is responsible for 12-20% of global greenhouse gas (GHG) emissions.[5] Between 1990 and 2020, an area larger than the EU was lost to deforestation, with the EU responsible for approximately 10% of land lost.[6] Forests are key carbon sinks, as they sequestered approximately twice as much carbon dioxide as they emitted between 2001 – 2019.[7]

• Biodiversity loss

Biodiversity loss is primarily caused by habitat destruction (the removal or degradation of forests and grasslands) inflicted by the direct actions of humans – through chopping down forests to make space for livestock and crops. To put this into numbers, half of all habitable land on Earth (i.e., land which is not glaciers, salt flats or desert) is used for agriculture, and nearly 80% of the land used for agriculture is used for animal agriculture (growing animals and animal feed) even though animal products only provide 18% of the global human calorie intake.[8] Almost 70% of land cleared from the Amazon rainforest, for instance, has been turned over to grazing.[9] Hence it is unsurprising that the ‘IUCN Red List of Threatened Species’ has listed agriculture as a threat for 24,000 of the 28,000 species threatened with extinction.[10] 88% of soy, 59% of cereals and 53% of pulses produced globally are used to feed animal livestock, not humans.[11] If everyone shifted to a plant-based diet, we would reduce the global land use for agriculture by 75%.[12] And that land could be returned to nature which would enable us to restore much of the lost primary habitats (forests, grasslands), historic wildlife corridors and, accordingly, a huge step to preserving remaining biodiversity.  

What efforts is Rize ETF making to combat deforestation?

Here, at Rize ETF we have been working with CDP on forest risk commodity disclosures for companies in the food sector since 2020. We have always recognized the importance of transparency hence we take part in the annual CDP Non-disclosure Campaign (NDC) where we are part of the efforts to encourage over 1,000 companies to disclose whether they have exposure to forest risk commodities along their supply chain.

We use CDP’s forest risk commodity data to determine whether a company is responsibly managing its exposure to all four of the major FRCs identified by CDP (Palm Oil, Soybean, Cattle and Timber) as part of our semi-annual screening process for our “Sustainable Future of Food” theme. Additionally, we publish the results of that screening process on our website so that investors can see exactly which companies we have screened for poor forest risk commodity management.

More specifically, the Rize Future First Policy (RFFP) provides that:

“Companies that refuse (or ignore requests) to engage in CDP’s annual independent review of their procurement and use of Palm Oil, Soybean, Timber and/or Cattle are excluded. Companies who do engage in the annual independent review but which cannot demonstrate that they are managing the deforestation risk associated with their procurement and use of Palm Oil, Soybean, Timber and/or Cattle (as assessed by CDP) will be excluded”

Conclusion

This landmark law passed by the European Parliament is a very promising move and a clear further demonstration of the leading role that the European Commission is playing in promoting sustainability.  In order to tackle deforestation, it is essential that companies are compelled to identify and mitigate the risk of deforestation in their supply chains, and report on that risk mitigation. Whilst we at Rize ETF are making efforts (in our capacity as investors in the transition to a sustainable food system) to compel companies to identify and manage forest risk, the more top-down laws and initiatives implemented by authorities in countries importing forest risk commodities (and products derived therefrom) from high-risk regions, the better.

Related ETFs

FOOD: Rize Sustainable Future of Food UCITS ETF

LIFE: Rize Environmental Impact 100 UCITS ETF

References

[1] Europarl, “Parliament adopts new law to fight global deforestation”, April 2023. Available at:https://www.europarl.europa.eu/news/en/press-room/20230414IPR80129/parliament-adopts-new-law-to-fight-global-deforestation

[2] Carbonbrief, “Q&A: What does the EU’s new deforestation law mean for climate and biodiversity?”, April 2023. Available at: https://www.carbonbrief.org/qa-what-does-the-eus-new-deforestation-law-mean-for-climate-and-biodiversity/

[3] Ibid.

[4] Ibid.

[5] Climate Funds Update, “Climate Finance Thematic
Briefing: REDD+ Finance”, February 2020, Available at: https://climatefundsupdate.org/wp-content/uploads/2020/03/CFF5-2019-ENG-DIGITAL.pdf

[6] Ibid

[7] World Resources Institute, “Forests Absorb Twice As Much Carbon As They Emit Each Year”, January 2021, Available at: https://www.wri.org/insights/forests-absorb-twice-much-carbon-they-emit-each-year

[8] Ibid.

[9] Ibid.

[10] Ibid.

[11] Ibid.

[12] Ibid.