Mandatory human rights and environmental due diligence have become the word of the day in policy-making targeting agriculture-driven tropical deforestation. Agriculture, and particularly the production of internationally-traded commodities such as beef, soy, palm oil and cocoa, drives as much as 90-99% of all land-use change in the tropics — a leading cause of greenhouse gas emissions and biodiversity loss.

Due diligence in this context means that companies must assess environmental and human rights risks in their supply chains, adopt prevention and mitigation measures, track the progress of adopted standards, implement grievance mechanisms, consult with stakeholders, and report on such measures. What started as voluntary efforts are now mandatory for many companies operating in the European Union (EU) and, increasingly, other countries such as Norway and the UK.

The EU has led such efforts, approving a deforestation regulation (EUDR) that requires businesses to prove that agricultural commodities do not come from lands deforested after 2020. On 15 March 2024, countries agreed on a Corporate Sustainability Due Diligence Directive (CSDDD) which, albeit being a watered-down version that applies only to large companies with over 1,000 employees, harmonizes due diligence rules in the EU.

Policy-makers’ explicit expectation is that companies trading with forest-risk commodities are not willing to forgo the European market and will, therefore, streamline these standards across their operations. In other words, we would witness a so-called “Brussels Effect,” referring to the EU’s ability to set regulatory standards that end up becoming the global norm, as seen in other domains such as data privacy, consumer protection, and AI technology.

However, a reality check regarding Europe’s ability to accomplish that in the case of agriculture-driven deforestation is needed.

The Challenge posed by Supply Chain Divergence

Supply chain divergence refers to the segmentation of exports tailored to different consumer requirements. Our research shows that this is an ongoing reality. We argue that further tactical rearrangements can significantly limit the additionality – and thus the effectiveness – of human rights and environmental due diligence laws. Compliant products would flow to Europe while the rest are consumed domestically or exported elsewhere, possibly without any overall change on the ground. This would especially be the case in sectors where Europe commands a minor market share, such as Brazilian soy.

We interviewed companies from the Brazilian soy sector and confirmed that segmentation is standard practice. While physical segregation of soy grains can be challenging, it has not been difficult for certain traders and regions exposed to very different levels of deforestation to specialize in markets that demand higher or lower levels of sustainability.

The most notable case is that of ALZ Grãos, a joint venture created by Amaggi, Louis Dreyfus Commodities, and the Japanese firm Zen-Noh to operate exclusively in the Matopiba region, one of Brazil’s leading deforestation frontiers. The parent companies focus on exporting soy from well-established agricultural areas with much lower deforestation levels, to demanding markets in the EU and Nordic regions. Meanwhile, ALZ, which exports soy exclusively to Asia, is exposed to as much as 20 times more deforestation per tonne of soy.

We have looked at Trase data to show how different countries are exposed to very different levels of deforestation in their soy supplies. Brazil’s exporters, for example, sell soy to Denmark and Norway that is four-times less exposed to deforestation than soy sent to China or used domestically (see table).

Deforestation exposure of different consumer countries to Brazilian soy in 2020 (Source: Trase).

Our analysis shows that EU laws helpfully scale up previous due diligence efforts by individual countries, encompassing Member States that have been relatively unconcerned importers, such as Spain. However, it is clear that environmental due diligence would fall short of its potential to tackle agriculture-driven deforestation if producers respond by channeling ‘clean’ supplies to Europe while carrying on with business as usual for consumption elsewhere. The EU would risk merely becoming a niche market, while tropical forest loss for the most part would go on.

Beyond cleaning individual supply chains: Making due diligence policies work

If Europe is hoping that its higher environmental and human rights standards for agricultural commodity trade will trigger a ‘Brussels effect’ where those standards become the new benchmark, more action is needed.

We propose three ways for the EU and other demand-side players to enhance their due diligence policies and positive spillover effects beyond cleaning up their own supply chains.

1. Get other major consumer markets on board the sustainability agenda, notably in Asia

Asian countries import increasing amounts of forest-risk agricultural commodities. China accounted for 75% of Brazil’s soy exports in 2023. In contrast, the EU imported just 10%. India is the largest buyer of Indonesian palm oil, and together with China, they took approximately 40% of the palm oil that the Southeast Asian country exported in 2022/2023, compared to only 12% sent to the EU. Other countries in the region such as Japan and Thailand also import more soy from Brazil than most European countries.

Through diplomacy and engagement with governments in these markets, the EU could share experience with the EUDR and its mechanisms such as risk benchmarking, traceability and monitoring to lower entry costs and help persuade them to embrace a similar approach. That could create a critical mass for higher environmental and human rights standards which then become a new global baseline.

2. Require due diligence from companies irrespective of where they do business and include the financial sector

The EU may have become a relatively minor buyer of some forest-risk commodities such as beef and soy, yet its economic influence in these supply chains far exceeds that of an importer. Large companies trading in commodities between countries such as Brazil and China often have headquarters and operations in the EU, meaning they are subject to EU regulations. Moreover, EU financial institutions provide investments and loans to agricultural commodity traders, and therefore could have significant influence over their management of environmental, social and governance (ESG) issues, irrespective of where their commodities are actually consumed.

The EU is an important global financial hub and home to many assets of multinational agricultural companies. It is therefore well-positioned to enforce mandatory human rights and environmental due diligence on these companies and their investors. French and German sustainability laws already contain elements of what will be scaled up by the CSDDD. Such rules can be much more powerful if applied at the EU level, and would even be more so if they also included the financial sector, which is exempt from the agreed-upon directive.

3. Combine ‘do no harm’ due diligence measures with ‘do good’ policies at the landscape level

Mandatory human rights and environmental due diligence essentially seeks to avoid causing harm to people or the environment in countries of production. However, the EU and other advanced economies also have at their disposal numerous policy instruments such as agricultural cooperation, development aid and incentives for the promotion of sustainable value chains – including those around the bioeconomy or novel products that spur local economic development while keeping forests standing.

At the landscape level, the EU and other players could engage more strategically to support activities such as sustainable land uses by smallholders, SMEs and indigenous peoples that can hedge against deforestation, but which often fail due to lack of economic or technical support. By combining such ‘do good’ policies with human rights and environmental due diligence, demand-side actors could foster landscape-level transformations.

This, however, requires thinking beyond the due diligence toolbox to combine it strategically with other policies. Meaningful partnerships with producer countries would need to zoom out from individual forest-risk supply chains to address the needs of other actors and the strategic roles they could play in fostering a transition to zero deforestation and conversion in landscapes of concern. Such measures can not only increase the effectiveness of EUDR in ultimately reducing deforestation but also help mitigate and avoid the growing resistance to foreign demand-side policies in producer countries. Perhaps most importantly, such measures would catalyze political support for much-needed sustainable development alternatives in deforestation frontiers.