EU Deforestation Rule Will Require More Scrutiny of Commodities, Sayari Says

A July 27 webinar offered by Sayari noted that the EU's recent deforestation rule expanded the scale and scope of responsibility for importers whose products could have been from deforested land (see 2212070039). In the past, the EU focused on illegally sourced timber, just as the Lacey Act does in the U.S., but politicians in Brussels decided that had not been effective.

Now, importers or manufacturers who buy palm oil, soy products, wood, cocoa, coffee, cattle, or rubber must certify the goods were not grown or produced on deforested land, or in the case of wood, that the harvest did not lead to forest degradation. While the regulation was promulgated in June, companies will have to provide information to the EU starting in December 2024.

Henry Peyronnin, a senior analyst for Sayari, said Sayari was able to combine Brazil's own environmental agency enforcement records, corporate records and trade records to show which firms have been fined most for harvesting in the Amazon. One example featured a fine levied on May, 18, 2023, for destroying 15 hectares of forest in a protected area without a license. Peyronnin said the fine is not proof the company was engaged in illegal logging -- it could have supplied inadequate documentation to the regulator, and fines are often contested. Still, he said, such fines "may point to legal or reputational risk" for companies doing business with these firms.

Once Sayari identified the companies with the most environmental fines, analysts examined 900,000 timber shipments by reading bills of lading data. He said they used the fuzzy matching package in Python and then manually reviewed matches until they had a high degree of confidence that the shipments were from the firms that had been penalized.

They found 84 companies with strong matches, which had been given 596 fines for environmental violations since 2022. From those firms, there were 3,630 consignments of timber to 71 countries. The same matching process also identified a cotton and beef producer, so the beef producer would have been germane to the EU regulation.

Of the top 10 recipients of these timber exports, No. 2 was France, the Netherlands was No. 3, Belgium was No. 4, and three others in the top 10 also were in Europe.

While this demonstration was focused primarily on timber, Peyronnin noted that Brazil's environmental agency fines also apply to producers of soy and cattle. "It is also possible to overlay geocoded corporate registry data with data on protected areas or deforestation to highlight proximity-based risk," he said in response to a question from Export Compliance Daily.

In an example involving Dutch company SWI Hardwood, he showed how seven of its 11 Brazilian timber suppliers have faced fines from Brazil's environmental agency. "Stopping deforestation in Brazil is a top priority for both the United States and the European Union," Peyronnin said, adding that the issue is a "critical point of contention" in trade talks between the EU and Mercosur, the South American trade alliance.

The new government of Brazil has stepped up environmental enforcement, he said, and deforestation fell 68% in April 2023 compared with April 2022.

Peyronnin said only Brazil has a publicly accessible database of environmental enforcement actions against firms, but that it is possible to investigate timber risk in Indonesia, Malaysia and Papua New Guinea by combining data on politically exposed persons, searching for local news coverage on corruption, deforestation and social conflict, and geocoding for protected areas. He added that Sayari is able to search for beneficial owners, and if an owner is an offshore entity whose identity is obscured, that "raises a lot of risk."

He also said other regions in Central America, and the Amazonian areas of Peru, Ecuador and Colombia, are all known to have deforestation struggles. Still, he said, "it's kind of hard to establish consensus about what establishes 'high risk.'" He noted that the EU will publish a list in 2025 of what it defines as high-risk countries.

He acknowledged that some countries have so little data available that it's hard to know who you're dealing with, listing the Democratic Republic of the Congo as an example.

Peyronnin was also asked if Sayari could identify gold that was mined in deforested areas. He said that Sayari could add national mining royalties data in Brazil to corporate records and export logs.

Another viewer asked if relying on forestry sustainability certifications is adequate. Peyronnin said that one of the firms Sayari identified as an environmental violator in Brazil has several forestry stewardship certifications, as do many European firms that import from the Brazilian firms Sayari identified as frequent violators.