IN DEPTH: The UK’s New Due Diligence Strategy

As we have pointed out on several occasions over the past few months, the UK is planning on introducing a ‘due diligence’ regulation for imported agricultural commodities – including palm oil.

The new due diligence regulation was – until recently – largely kept under wraps by the UK, with a public consultation launched last week.

However, Deputy Foreign Affairs Minister Mahendra Siregar has requested direct consultations with the UK government in a strongly worded letter to the UK’s diplomatic representative in Jakarta.

In the letter, Minister Mahendra underlines that “Indonesian legal framework for sustainability is ISPO [Indonesia Sustainable Palm Oil standard]”.

The letter also indicates that Indonesia is seeking to work more closely with the UK, flagging the possibility of a mutual recognition arrangement (MRA) or a form of verification upon export, similar to the arrangements struck under the Voluntary Partnership Agreement (VPA) between Indonesia and the EU for timber products.

Most importantly, it underlines the importance of Indonesian rural and smallholder livelihoods in any future discussions, which appear to be absent from the UK’s consultation document.

The direct palm oil trade between Indonesia and the UK isn’t large. However, Brussels will be looking to the UK’s actions when it introduces similar measures over the next year or more. When that happens other Indonesian commodities – notably rubber and cocoa – will also come into play.

The public consultation document can be accessed here. Below we take an in-depth look at the document, as well analyse how we think the proposal will play out.

The Policy Proposal and the Scope

In short, the UK government wants to introduce laws that will:

  • Ban the use of forest commodities that have been produced illegally in their country of production. This will include their use as ingredients.
  • Make it illegal for businesses not to conduct due diligence on their supply chains for forest risk commodities.
  • Penalise companies that don’t comply.

As we’ve also pointed out previously, the model that the UK is likely to follow is that of the EU Timber Regulation (EUTR). The offences under the EUTR are created by those who first put the product in question on the UK market. The consultation also narrows its definition of ‘illegal’ to local laws. We will come back to that later.

A big question will be of scope. There are many factors to consider.

The EU and UK-funded think-tanks have narrowed their definition of ‘forest risk commodities’ in a previous feasibility study. They are: palm oil, soy, rubber, beef, maize, cocoa and coffee. Coffee, however, is conspicuously absent from the UK document.

The next question is whether it is possible to define products well enough on the market. Importers of timber into the EU place the product on to the market first and comply with the EUTR; but it becomes unnecessarily complicated if a furniture maker buying timber for a sofa frame from an EU-based merchant is required to check the legality of that timber.

But the scope of the products is also an important consideration. Sawn timber, like CPO or bulk soybean, is easy to capture. What about oleochemicals? What about detergents? What about compound animal feeds?

It’s more likely that what will determine the scope will be how well products are defined according to customs codes, and will aim for simpler products. Many importers of products will be oblivious to the type of vegetable oil their products may be derived from or manufactured with.

The Offence and Compliance

The offence will likely be created for an importer that imports a product – and places it on the market — without conducting the appropriate due diligence. As with the EUTR, authorities will provide guidance on how they approach it. There will be a number of factors. There will be an assessment of risk, based on the country of origin. This will more than likely be produced by an external consultant. The EUTR also allows for the use of ‘off the shelf’ solutions from timber certification as part of EU due diligence procedures. It’s therefore highly likely that the UK will opt for these solutions, including RSPO – and potentially MSPO and ISPO. There will also be a push for the inclusion of other certification schemes within the guidance, and these will most likely be those with serious NGO backing such as the RTRS (Roundtable for Responsible Soy) and FairTrade.

As with all compliance, this will very much be about following the procedures and record-keeping.

The Penalties

News stories have indicated that regulatory authorities will be pushing towards fines for non-compliance. The EUTR requires member states to determine their own penalties for non-compliance. In the UK the penalties are proportionate to the amount of product imported – e.g. around several thousand pounds for an offence – after warnings of non-compliance.
These penalties have been criticised by some NGOs for being too lenient. But one of the problems is of monitoring and enforcement. It’s relatively easy to prove someone has imported something recklessly, i.e. they simply didn’t fill out the paperwork, compared with a company that may simply have sloppy processes, or was given forged documents by an overseas supplier.

The Winners

The winners in this situation will most likely be larger companies and certification schemes. The largest plantation owners and those that have made zero-deforestation commitments will have no problem with compliance. Although NGOs may see this as an opportunity to force greater levels of compliance from Golden-Agri and others, this will simply not be the case. This is about having importers undertaking due diligence; it is not about ensuring compliance of foreign companies with foreign laws in foreign countries. This is also one of the reasons that having smaller companies and importers out of scope is important; large companies such as Tesco can afford to put systems in place for compliance. Niche importers would suffer disproportionately.

The Debate: Two Issues

There are two things that will likely dominate the debate over this regulation.

  1. UK NGOs will attempt to push DEFRA in two directions. They will criticise the regulation for being a legality standard, rather than a sustainability standard, that relies on local laws. Greenpeace has already stated that this is ‘seriously flawed’.
  2. A related point is that national standards – such as ISPO and MSPO – will therefore feature heavily in the debate. Both are organised around compliance with local laws, with some additional requirements. NGOs – such as EIA (see below) – have already argued against including ISPO on its own as an appropriate compliance tool.

There are some signs that UK authorities are acutely aware of the difficulties in implementing any policy proposal, and the effectiveness of any proposal in terms of reducing deforestation.

Implications for UK’s Post-Brexit Free Trade Aspirations

Despite what defenders of due diligence measures may argue, this is a non-tariff measure that impacts trade, in the same way that local licensing or import requirements are also considered non-tariff measures. This can and potentially will jeopardise the UK’s desire to improve its trade relationships around the world.

The implementation of any measure will also be difficult, and defining scope will be essential. The EU feasibility study on potential measures stated of due diligence that it has a “High contribution to the objective, but [is] technically and politically very challenging

The scope question is also related to the effectiveness of the measure. DEFRA is very careful not to define their policy objectives. They are seeking to ‘ensure that forest risk commodities are produced legally and sustainably’. The idea of introducing a law that seeks to reduce deforestation in other countries is fraught with difficulty.

For example, let’s say the UK imports palm kernel oil for oleochemicals. The UK introduces a due diligence measure on PKO that is very strict. As a response, exporters (and importers) decide to switch to a more transformed product, possibly switching to imported finished products rather than raw materials. Does the UK then attempt to impose a new rule on the imported product? The same could be said for imported animal feeds or food products. This problem of ‘leakage’ is always one to consider and is a perverse outcome. For a while, there were reasonably reliable rumours that exports of African timber to Indonesia soared as it was possible for them to be exported to the EU under the SVLK system. This would not be possible for a product like palm oil, but it’s the kind of outcome all players here – particularly NGOs – would want to avoid. 

This consultation is just the first step in the debate. Expect things to become much more heated over the next few months.

Responding to EIA

As noted last week, EIA has taken issue with the way Palm Oil Monitor has reported on their activities in relation to the Indonesia Sustainable Palm Oil (ISPO) standard.

Their response, which is here, underlines why we chose to express our opinions on the combined actions of the UK and various UK-supported NGOs in the first place. There are three specific points that we also take issue with.

1. EIA states that “With regard to Palm Oil Monitor’s assertions that the EU wishes to exclude palm oil from EU supply chains, this is not the case…”

There are a number of reasons that we in the palm oil community – along with government officials and stakeholders across the region – are of the view that the EU is seeking to exclude palm oil from EU supply chains. Here’s a list:

With specific regard to the exclusion of palm oil from the Renewable Energy Directive, Brussels has been well aware for several years that pushes for such action would not only be trade disruptive, but also damage EU-Indonesia relations.

This list is by no means exhaustive. But, from the perspective of the palm oil community in Indonesia, Malaysia and elsewhere across the world, it looks very much as though EU authorities and stakeholders are seeking to exclude palm oil from EU supply chains.

NGOs can keep telling themselves they support palm oil, while they actually support regulations that reduce, or could lead to the elimination of palm oil from the marketplace. To producer countries, it is starting to sound very much like, “I’m not anti-palm oil, but …”, or even, “Some of my best friends are Indonesian palm oil producers, but…”.

The cheers of Dutch MEPs (let’s repeat that, Dutch) expressing their joy at having excluded Indonesia’s largest agricultural export from the EU’s renewable programs simply add to this image.

2. We argued that EIA is attempting to undermine ISPO in the eyes of EU policymakers. We are of the opinion that EIA is certainly attempting to diminish ISPO in this regard. EIA’s response supports this: “EIA believes that solutions from both producer and consuming countries can be found through a process of consultation and we are committed to support any initiatives from the Government of Indonesia to achieve that… It had been hoped that the ISPO reform process would be similar [to SVLK], in that it would be an inclusive, multi-stakeholder consultative process resulting in an agreed standard among stakeholders which can be accepted by international markets … However, the ISPO reform process has been far less consultative and has not resulted in a deliberative multi-stakeholder process to revise the certification standard.”

One of the key differences between the development of the SVLK legality standard and the ISPO strengthening project is that they were designed for different things.

As the EIA is well aware, the SVLK legality standard was developed as part of the Voluntary Partnership Agreement (VPA) process. VPAs are the other half of the EU’s FLEGT approach; where the EU Timber Regulation requires timber product importers to undertake due diligence on imports, the SVLK gives assurance to that due diligence; it effectively becomes a ‘green light’. The VPA was part of a bilateral, government-to-government project aimed at stamping out illegal logging in Indonesia.

This was not the case for ISPO reform, which was as the EIA rightly points out, an initiative of the Indonesian government.
However, as noted above, the UK has just made a decision on introducing a due diligence measure for so-called forest risk commodities. This decision has been taken without the commencement of a VPA process or similar. This process has been in train for some time, and EIA has no doubt been aware of it.

Given that the EIA genuinely did not achieve what it was seeking in the ISPO reform process, and that national standards such as ISPO will need to have a pivotal role in both the implementation of any due diligence system, as well as UK-Indonesia relations, we do not believe it was unrealistic for us to argue that the EIA is seeking to have ISPO excluded as an equivalent ‘green light’ for any UK due diligence measures on palm oil.

In fact, the EIA nearly says as much: “EIA has not advocated that the ISPO scheme or any other certification scheme should be excluded from such regulations, only that these should not be relied on alone.”

We therefore arrived that the conclusion that EIA is arguing that ISPO cannot be accepted by international markets, and certainly not the forthcoming UK due diligence regulation.

3. Our final point is that the EIA states, “To allege that EIA is working for the UK and EU governments to undermine marginal farmers is nonsensical.”

The EIA has been drafted by the UK Department for International Development to “Support[] civil society in Indonesia in the strengthening of the Indonesian Sustainable Palm Oil (ISPO) mandatory certification scheme, using this process to feed into any EU action on deforestation.”
First, the EIA is clearly being paid by UK and European institutions, that is not in doubt.

Is EIA undermining marginal farmers? This is a matter of opinion, but here is ours. If a NGO or any other group makes it more difficult for marginal farmers to export their products to the European Union (or the UK), we would argue that they are undermining smallholder farmers. Most right-thinking people would agree with us.

Is the EIA asking for tougher regulatory barriers for smallholder farmers exporting to the EU? This would appear to be the case.

Has EIA supported the Renewable Energy Directive Revision, which makes it virtually impossible for any palm oil smallholder to export to the EU in the form of biofuels? This would also appear to be the case.

We do not, for example, see the EIA supporting further exemptions for smallholders of any kind. The EIA acknowledges that smallholders face enormous difficulties in Indonesia, whether that is because of proving the legality of their land or otherwise. But these difficulties do not appear to warrant any kind of exemption, in their view. And this is precisely the problem with how we see the current palm oil debate. The “we’re not anti-palm oil” NGOs and EU policymakers argue that they support smallholder rights and poverty alleviation – just as long as the farmers aren’t producing palm oil and exporting to the European marketplace, which could threaten their vastly overpriced, uncompetitive domestic oilseed industry, all done in the name of protecting the environment and stopping climate change.