Impacts of new ESG measures under discussion in the EU on Brazilian companies

In November 2021, the European Commission presented a proposal for a regulation on the marketing of deforestation-free products in its territory, with the aim of preventing agricultural commodities linked to deforestation or forest degradation practices from circulating on the European market. Consensus has not yet been reached regarding the final text of the regulation, however, the proposal is advancing in the European parliament.

The original proposal stipulates points to be analyzed to define the risk, which, in principle, will be: (i) rate of deforestation and degradation; (ii) rate of expansion of agricultural land; (iii) production trends; (iv) emissions from deforestation; (v) any agreements signed with the EU that deal with deforestation and that facilitate compliance with the Regulation; and (vi) whether the country has national laws that seek to prevent deforestation and present severe sanctions.

Recently, the European Parliament approved an amendment to the proposal that expands the list of commodities that should be banned from entering the European market if they are linked to deforestation and forest degradation. Included in the list: chicken, pork, sheep and goat meat, corn and rubber, as well as charcoal and printed paper products. In addition to checking the conformity of the product exported to Europe, the regulation intends to verify the origin of the entire production chain upstream of said product. Therefore, it is necessary to adapt the entire Brazilian export chain in order to maintain the continuity of export flows.

It is noteworthy that the agribusiness sector will be the main one impacted by the new measures. If restrictive measures on imports in the EU are applied, a fifth of the Brazilian soy that is currently exported would be inadmissible due to the new measures. It is estimated that the cerrado region known as Matopiba, made up of states such as Maranhão, Tocantins, Piauí and Bahia, will be one of the biggest affected by the application of the measure. Even if deforestation is considered legal by the country of origin, it will be possible to apply a measure based on the European standard. The measures raise concerns regarding transaction costs and the effectiveness of implementing the criteria to be adopted by Brazilian exporters. In addition to internal implementation, Brazilian producers and industries that export to the EU will have to structure inspection and incentive mechanisms for the upstream chain, to ensure that their suppliers also comply with the new compliance guidelines.

Some companies, including Brazilian ones, are already taking measures to adapt the production chain of products linked to deforestation, changing their practices so that their products are more sustainable, free from deforestation, with a focus on sustainable environmental practices and free from slave labor. They also require their suppliers to follow the same practices. The proposal at the European Commission does not yet have an approval deadline, given the complexity of the deliberations and the repercussion of its impacts. However, the structuring and prior adaptation of exporting companies, in relation to sustainable practices in their products and supply chain, is extremely important, given the tendency for future application of measures by other countries.

In this context, it is recommended that both the trader and the supplier have historical data and documents about the origin of the product and the production chain, as they may be inspected and fined by inspectors in the European Union (EU). Therefore, it is recommended that operators and exporters implement compliance programs in order to mitigate operational risks and ensure best export practices.

By Maria Eduarda Hajjar Milki e Julia Pillati, lawyers at Barral Parente Pinheiro Advogados