The UK Government recently announced that it is developing legislation that would make it illegal for large businesses operating in the UK to use certain commodities that have not been produced in line with local laws, and require in-scope companies to conduct due diligence to ensure that their supply chains are free from illegal deforestation and ecosystem change. A failure to comply could result in significant fines (the precise levels of fines are yet to be determined).
The legislation has the potential to impose market restrictions and extensive supply chain due diligence obligations, but it appears that it will be limited to certain “forest risk” commodities — including those embedded within products — whose rapid expansion is associated with deforestation. The UK Government is currently consulting on the potential law. The UK Government anticipates that the law will particularly impact supermarkets and fashion houses, meat and dairy producers and businesses using palm oil and other natural ingredients; and has suggested that legislating might offer legal certainty and clear obligations for businesses.
The UK Government’s proposed legislation seeks to clamp down on illegal deforestation and ecosystem change and to complement the current initiatives of producer country governments and businesses. In its announcement, the UK Government stressed the importance of forest protection in tackling climate change, noting specifically that:
- deforestation accounts for circa 11% of global greenhouse gas emissions;
- an estimated 80% of deforestation is caused by the production of agricultural commodities; and
- much forest clearance to produce these commodities is not considered legal.
The impetus for this UK legislation comes from recommendations published earlier this year by the Global Resource Initiative (“GRI”), a UK independent taskforce. In this blog post, we consider the scope of the proposed legislation and what this could mean for in-scope businesses, and provide some context on the wider GRI recommendations and the international sustainability due diligence drive.
The scope of the proposed legislation
If promulgated, the UK’s “world-leading” legislation would forbid in-scope businesses from using products, unless they overcome an evidential burden to prove that they have been responsibly produced in a sustainable manner, and comply with local laws to protect natural ecosystems. According to the consultation paper, the proposed law would effectively make it illegal for businesses in-scope to use, either in production or trade within the UK, forest risk commodities that have not been produced in accordance with the relevant laws in the country where they are grown.
Businesses in-scope of the legislation may be required to carry out extensive due diligence on their supply chains, publishing information denoting from where key commodities — currently anticipated to include beef, cocoa, leather, palm oil, pulp and paper, timber, rubber and soya — have been sourced. More specifically, businesses would be obliged to: collate information on exposure to specific risks within their supply chains; assess and take action to mitigate those risks and impacts; and publicly report on the steps they are taking. Importantly, “forest risk commodities” will likely include those embedded within products, intended to cover, for example, meat and dairy from soya-fed animals, and products containing palm oil.
The proposals currently focus on “large” businesses, to be determined by turnover and employee number. It is possible that the law might follow other EU and UK environmental and sustainability initiatives that define large undertakings as those that are not small-medium enterprises (“SMEs”) in accordance with international and national accounting legislation. The Government anticipates that supermarkets and fashion houses are most likely to be impacted by the proposed legislation, in addition to “companies that place agricultural and forestry commodities or derived products on the UK market”. The determination of which businesses fall in-scope under similar diligence and reporting frameworks has proved complicated for many businesses, especially those with complex corporate structures and those going through expansion.
The Government intends to ensure that the legislation augments and aligns with existing UK non-financial corporate reporting and due diligence frameworks. Sanctions for non-compliance are still to be determined, but current high level proposals suggest that the Government will be able to levy fines and other civil sanctions against businesses that continue to use forest risk commodities that have not been produced legally and/or that do not have a robust system of due diligence in place.
The proposal against the backdrop of GRI’s Recommendations
The proposed legislation follows recommendations put forward by the GRI to the UK Government in March 2020. Formed in 2019 to consider how the UK could ‘green’ international supply chains and leave a lighter footprint on the global environment by slowing the loss of forests, the GRI is constituted of leaders from the private sector, the public sector and NGOs and formed in 2019.
One of the key GRI recommendations was the introduction of a mandatory due diligence requirement. Some of the important scoping aspects of this GRI recommendation included that:
- due to diligence obligations should cover both human rights abuses and environmental risks and impacts, which will need to be carefully and clearly defined; and
- obligations for companies should be commensurate with the size of the organisation, their impact and ability to influence change;
- the financial sector should also be covered by a similar mandatory due diligence obligation, undertaking due diligence in order to avoid their lending and investment activities funding deforestation.
The extent to which any eventual legislation will incorporate these suggestions is currently unclear.
The GRI also recommended the introduction of a legally binding target to end deforestation within UK agriculture and forestry supply chains as soon as practicable, by no later than 2030.
Next steps: consultation
The UK Government — in particular, the Department for the Environment, Food and Rural Affairs (“Defra”) — has launched an online consultation on the draft legislation to solicit views from the UK and international stakeholders (closing on 5 October 2020). Feedback to the consultation will inform the Government’s response to the GRI’s due diligence recommendation, and assist in weighing the potential impacts of the proposed legislation on businesses and other interests.
If the Government decides to legislate, the intention currently seems to be to that the legal framework will be established in primary legislation, followed by more detailed secondary legislation, and subject to further consultation.
Wider context: the proliferation of due diligence obligations
Following the UN’s adoption of the Guiding Principles on Business and Human Rights (“UNGPs”), there has been an increasing trend of national and regional regulatory initiatives, including human rights and environmental due diligence and reporting requirements.
One such significant initiative is in motion an at EU level. On 29 April 2020, the EU announced that it would introduce legislation in 2021 to make human rights and environmental due diligence mandatory for EU companies (see our May 2020 blog post here). The European Parliament is currently preparing a Legislative Initiative Report on the topic and we are expecting a Commission consultation in the coming months. EU Commissioner for Justice and Consumer Affairs recently confirmed that the Commission will include the regulation in the next official Commission Work Program for 2021 (expected to be published in October 2020). These efforts are taking place in the context of the EU’s wide suite of regulatory initiatives that are part of the “European Green Deal” (see an overview webinar here).
The UK Government considers that by introducing a mandatory deforestation and ecosystem supply chain law, it will provide businesses with some legal certainty by setting a “floor” and minimum standards to meet. However, against a backdrop of a rapidly evolving patchwork of due diligence requirements — including the more comprehensive, potential EU human rights and environmental due diligence regulation — it is possible that, for in-scope businesses, the UK’s introduction of further issue-specific due diligence obligations will exasperate the compliance challenges caused by a piecemeal approach.
If you have any questions concerning the material discussed in this client alert, please contact the following members of our Business and Human Rights, Environmental & Product Stewardship, Global Public Policy, and Compliance teams:
Summreen Mahween (trainee)