From directive to action: How the EUDR affects supply chains
The EUDR may appear abstract to individuals who do not have direct experience in food supply chains, commodity trade, or related fields.
So let’s paint a picture of a simplified example of a conventional chocolate bar containing cocoa from West Africa:
The retailer offering the chocolate bar has acquired the product from a trader or wholesaler, who, in turn, obtained it from a manufacturer. The manufacturer sourced the individual ingredients from three different ingredient suppliers. One of these ingredient suppliers has refined raw cocoa beans into cocoa-based ingredients (e.g. cocoa butter, cocoa mass or cocoa powder). Raw cocoa beans are imported in bulk, with the processor—still operating within the EU—only segregating beans to a limited extent for certain specified purposes. For the sake of simplicity, we skip a couple of supply chain links (and a complicated political process involving minimum prices and the Côte d’Ivoire Cocoa Board) and move to the cooperative in rural West Africa who sells the actual cocoa beans. These cocoa cooperatives are made up of thousands of smallholder farmers and families, each with their own small plot of land scattered across large areas of farmland, much of which was previously rainforest.
Coming back to the retailer who sold you the chocolate bar their obligation under the EUDR is to verify the geolocations for all plots of land from which the cocoa in that chocolate bar originates, before it hits retail shelves. This procedure also includes being able to document that no human rights or labor rights were violated in the production of that cocoa.
Overwhelming? Understandable. And we haven’t even talked about the fact that our chocolate bar might also contain palm oil…
This is of course a simplified picture, and there are provisions within the legislation as well as related official guidance and FAQs that allow for certain measures to facilitate the practical implementation of the EUDR. But no matter what, it will require transformative change, substantial operational impact and supply chain collaboration to make our illustrative chocolate bar deforestation free.
What’s the upside — and when will we see it?
It is evident that compliance with the EUDR requires considerable investments for numerous companies. Substantial resources must be allocated to new supply chain systems, technological solutions and systems integration, traceability measures, due diligence processes, and extensive supplier engagement. In particular, the latter part is beginning to have a noticeable impact, as suppliers often have clear incentives to meet EUDR data requirements and obligations for their customers.
If successful, global supply chains will increasingly favour sustainable agriculture as non-compliant goods to the EU are gradually restricted. As the risk of fines, customs issues and production problems for European operators and traders increases, the upstream demand for more transparency and traceability will nurture much needed supply chain collaboration and co-investment. If this happens, we may yet see a point where producers on the ground (for example cocoa farmers in West Africa, coffee growers in Kenya or palm oil smallholders in Indonesia) will be economically rewarded and incentivized for establishing more sustainable production practices.
If that happens, we can expect the EUDR to address deforestation and human rights issues while protecting the rights and livelihoods of indigenous peoples and local communities dependent on forests.
Translating the EUDR’s benefits into a business case
If the EUDR functions as intended, we should consider not only the environmental implications but also the business opportunities it presents. As a business leader, imagine you’re in the middle of a crisis, where supply chains are disrupted, urgent decisions are needed, and visibility is limited. Now ask yourself: Would you have wanted the insights that could have helped you steer clear of this storm?
Unpredictable and extreme weather events, rising temperatures, changes in precipitation patterns, soil depletion from unsustainable agricultural practices and other sustainability-related issues are already causing supply chain disruptions and increased sourcing costs — just look at what happened to cocoa and coffee prices during the last year. These are real causes of concern, and would make any category manager worry about next year’s profit margins and sales volumes. To mitigate such risks, companies should maintain sourcing options and alternatives that are readily available, and ensure that relevant risks are continuously identified and monitored. To this end, transparency, traceability and supply chain collaboration will be key ingredients in the economically sustainable business case of the future.
The EUDR represents a golden opportunity for businesses to increase knowledge, gain insights and establish much needed sustainability risk processes to stay successful and profitable in an increasingly uncertain world.
If your business falls within the scope of the EUDR and you are planning its implementation, it may be useful to explore ways to improve your investment. If you are uncertain about whether your business is in scope, it is advisable to clarify this promptly. For more information on how the EUDR can be applied to risk management, resilience, and sustainable supply chains, further resources are available – contact your local EY, representative.