The legislation bans imported goods linked to deforestation and forces companies to scrutinise their supply chains for deforestation risks. Environmental law charity ClientEarth has called it “a gold standard” that could halt nature loss and safeguard biodiversity. The legislation represents a significant step forward in tackling global deforestation as it would be the first regulation to introduce legal obligations against deforestation pledges, at least with regard to EU imports.
However, in early October, the European Commission proposed a 12-month delay to the regulation and the European Council agreed, saying the extra time would ensure countries and companies are “fully prepared” to carry out their due diligence obligations. While some stakeholders argue the delay is justified given the new requirements of the EUDR, others say the delay will come at the cost of continued deforestation and threats to indigenous communities, as well as driving business uncertainty and putting investment at risk.
While the EU Commission has stated that the legislation will remain unchanged, this delay could open the door to further revisions that may result in a more watered-down version. For example, we have already seen the introduction of a “no risk” category for the classification of countries. Countries classified as “no risk” would be defined as “countries with stable or increasing forest area development” and would face less stringent requirements.
Members of the Investor Policy Dialogue on Deforestation (IPDD), including institutional investors RBC BlueBay Asset Management and Storebrand Asset Management have expressed their concern with this latest re-classification.
From the company perspective, the postponement will be costly. The European Commission’s own impact assessment suggests that EUDR compliance could cost companies between $170 million and $2.5 billion per year. Companies like Nestlé and Mars, which report to have taken steps to improve their supply chains and combat deforestation, now find themselves at a disadvantage to those competitors that took a wait-and-see approach.
From a fixed income perspective, we recently analysed the pricing impact for bondholders, looking at the trading company Cargill. Our analysis suggested that the financial risk posed by EUDR-related costs on Cargill’s outstanding bonds has yet to be fully digested by market participants. Ongoing delays and uncertainty increase the underlying credit risk exposure during such a period. We also considered how the EUDR drives heightened credit risk in the event of non-compliance, demonstrating how the legislation supports investors by helping to price in deforestation risk.
While the EU Commission maintains that the EUDR will remain intact, the delay is evidence that the political and economic pressures are risks that investors will need to factor in when building their own nature-related investment mandates.
