"Forest Risk Commodities" and ESG due diligence

Under Schedule 17 of the Act, a regulated person must not use a "forest risk commodity" in their UK commercial activities unless relevant local laws are complied with. A regulated person in this context will be defined during the consultation process, but will generally include large businesses with turnovers that exceed a stated threshold. In addition, the Consultation suggests potentially different thresholds for the use of each commodity, with thresholds of £50 million, £100 million or £200 million as options for each commodity.

Regulated persons who use commodities in their commercial activities must also establish and implement a due diligence system in relation to that commodity. Qualifying businesses will also be required to report on the actions they have taken to implement such due diligence system.

Secondary legislation is required to implement the due diligence requirements set out in the Act and to fine tune the requirements set out above. This legislation will specify several key matters, including:

1. which commodities will be in scope of the regulations,
   
   
2. which businesses will be within the scope of the provisions,
   
   
3. what businesses in scope will be required to undertake and report on regarding their due diligence exercise,
   
   
4. the exemption threshold, and
   
   
5. how the requirements will be enforced.

The Consultation will collect views on these areas ahead of the publication of the secondary legislation, which will ultimately steer the legislative text and shape the Government's guidance.

The key points of the Consultation are outlined below.

The Secretary of State is given powers under the Act to specify the "forest risk commodities" which will be introduced under the regulations through secondary legislation. Under the Act, a commodity may only fall under the definition if the Secretary of State considers that forest is being or may be converted to agricultural use for the purpose of producing the commodity.

The Consultation proposes the addition of seven commodities that are together responsible for 65% of the annual tropical deforestation risk associated with UK supply chains: cattle, cocoa, coffee, maize, palm oil, rubber and soy.

Once chosen, commodities will be introduced to the secondary legislation in phases, beginning with those commodities that contribute most significantly to deforestation.

The Act sets out that, to be in scope of the requirements, a business must:

• exceed a specified turnover, and
  
  
• use regulated "forest risk requirements" in its UK commercial activities.

Secondary legislation is expected to determine the definition of 'turnover', as well as the threshold above which businesses will be in scope. UK businesses will be in scope if their total turnover in the previous financial year exceeds the threshold. For non-UK businesses, this would include either the turnover of their UK activities or their global activity, whichever is higher.

Businesses that fall in scope of the due diligence legislation can give notice to be exempted from requirements if the amount of a commodity they use in their UK commercial activities in a given year falls under an exemption threshold. As outlined above, the Consultation is seeking views on what such threshold levels should be and how they should be calculated. 

Under the Act, businesses in scope must:

• identify, and obtain information about, regulated commodities,
  
  
• assess the risk that relevant local laws were not complied with, and
  
  
• mitigate that risk.

Guidance will be published which will be designed to help organisations determine whether there is a low, medium, or high risk of illegal land use and land ownership in a source country or sub-national region. In their annual report, businesses in scope will be required to provide information on how they have assessed and mitigated risk.

Businesses in scope will also have to report annually on their due diligence exercise, so that a regulator can identify areas for further scrutiny. The Government is looking to gather views on what businesses should report on and what information should be made public.

It is anticipated that the regulatory body or bodies that will regulate this legislation, and thus become the "Enforcement Authority", will be determined by the outcome of the Consultation. The Secretary of State has the ability to retain the enforcement functions or confer those functions on a regulatory body or bodies. The Enforcement Authority will be tasked with monitoring and investigating compliance and imposing sanctions when a breach has been identified.

The Government is proposing that for variable monetary penalties, the maximum penalty is £250,000. Guidance is expected to be published on how civil sanctions may be used.

This new legislation forms part of a wider trend towards enhanced ESG due diligence laws and increasing accountability for ESG non-compliance in supply chains, both in the UK and at an EU level (see, for example, our article on the EU's latest ambitious proposals for a mandatory human rights, environmental and due diligence regime here).

Indeed, a similar legislative proposal introduced at an EU level in November 2021 – the "Deforestation-Free Products Regulation" - anticipates harmonization in aspects of EU due diligence regimes, including in relation to reporting requirements. Precisely how, and whether, reporting under the UK's existing and proposed ESG due diligence regimes will be aligned with their EU equivalents remains to be seen. However, businesses would be well served in taking a holistic approach when revisiting their risk mitigation and management measures.

From a practical perspective, businesses with international supply chains - and particularly those that use goods and/or materials that could fall under the category of "forest risk commodities" - should consider carefully reviewing their current ESG due diligence and reporting processes to ensure that they are well prepared ahead of the results of the Consultation in March next year.