Analyst Insight:Over 10% of global greenhouse gas emissions stem from deforestation and forest degradation, driving the EU’s upcoming implementation of stringent regulatory requirements to mitigate the environmental impact of top contributing commodities, such as cocoa, palm oil and coffee.
The EU Deforestation Regulation, otherwise known as EUDR, will drive positive change across global supply chains but will also abruptly upend the way suppliers and brands have operated for decades. Most notably, EUDR will impact commodity prices and supply dynamics, forcing major players inthe cocoa industryand others to invest in costly measures to address the primary issues. Across the industry, food and beverage enterprises are working to achieve complete supply chain traceability, improve data accuracy, reevaluate suppliers, seek alternative sourcing and strive for deforestation-free supply chains.
EUDR compliance standards create several challenges, requiring food and beverage companies to take the following steps for successful adaptation:
Get closer to the field. Many enterprises, especially those operating globally, face a significant challenge in understanding and tracing the origins of their commodities. This lack of transparency stems from disjointed supply chains and insufficient mechanisms for tracking product origins. To address this challenge, companies must prioritize building closer relationships with their suppliers and farmers. This involves establishing direct communication channels, conducting comprehensive supplier assessments, hiring field reps to visit the fields, and implementing traceability systems. By fostering transparency and collaboration throughout the supply chain, enterprises can gain greater insight into their sourcing practices and ensure compliance with EUDR standards.
Improve data accuracy. Handing over information within food and beverage supply chains often leads to discrepancies and inaccuracies, undermining efforts to achieve regulatory compliance. Challenges such as engagement issues, technological constraints, language barriers, and manual processes using pen and paper contribute to these data-accuracy issues. To improve data accuracy, companies must embrace digitization and deploy innovative technologies. Implementing reliable tracking systems using technologies like enterprise resource planning or the internet of things, standardized data formats, and real-time monitoring tools can help bridge information gaps and ensure data integrity.
Incentivize growers. EUDR and other ESG regulations require growers to abandon time-honored traditions that have worked for generations, and pivot to eco-friendly alternatives with no guarantee of equivalent crop yields or revenue. Resistance from growers may stem from concerns about potential disruptions to traditional farming practices and uncertainty about future revenue streams.
To incentivize growers to embrace sustainable practices, enterprises must offer non-regulatory incentives and support mechanisms. This may include providing financial incentives such as premium pricing for sustainably sourced products, investing in training and capacity-building programs, and facilitating access to resources and technology. By empowering growers and demonstrating the economic benefits of sustainable agriculture, enterprises can foster buy-in and encourage widespread adoption of EUDR-compliant practices.
Learn about and adhere to local legislation. The EUDR focuses on deforestation but includes the requirement to comply with local legislation as well. This further complicates compliance efforts, as these laws vary significantly across regions. Differences in regulations related to land use, environmental protection and labor practices pose challenges for companies operating in multiple markets, and add a whole other layer to compliance. To navigate this complexity, businesses must conduct thorough assessments of regulatory requirements in each market to then develop tailored compliance strategies. This may involve engaging with local authorities and stakeholders, collaborating with industry associations, and seeking legal expertise to ensure adherence to local regulations. By proactively addressing regulatory challenges and staying abreast of local legal requirements, enterprises can mitigate compliance risks and maintain their commitment to sustainability and ethical sourcing practices.
