Investors should review their portfolios as new European Union rules targeting deforestation are set to reverberate through companies exposed to key commodities, according to analysts at Jefferies Financial Group.
Companies whose goods incorporate raw materials such as rubber, palm oil and cocoa or livestock products such as beef are potentially in the crosshairs, as the EU enforces regulations designed to slash global deforestation.
The bloc, whose rules affect all investors and companies doing business with and in the EU, has set a goal of stopping 10% of deforestation and reducing CO2 emissions by at least 32 million metric tonnes a year.
Companies found to have inadequate policies addressing deforestation and biodiversity risk being caught out by “the increased due diligence requirements” that follow as a result of the EU’s Deforestation Regulation (EUDR), Jefferies analysts led by Luke Sussams said in a note.
Among companies that Jefferies says may be impacted are DN Automotive, Hankook Tire and Technology, Kuala Lumpur Kepong Berhad, Nexen Tire, Golden-Agri Resources, Darling Ingredients and SD Guthrie Berhad.
EUDR requires companies to trace raw materials used in products entering the EU right back to their place of origin. Corporations need to document that their goods weren’t made using commodities sourced from deforested land and that no human rights were violated.
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Such checks need to go as far back as Dec 31, 2020, with failure to do so leading to potentially hefty fines.
The regulation is already having an impact. Amid concerns about a squeeze in coffee supplies, futures for September delivery versus December contracts surged earlier this month in New York, leading to the widest spread since trading started in January 2022.
In July, US papermakers warned of higher prices for diapers, sanitary pads and other hygiene products, due to EUDR.
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Companies and government officials, including from the US, have asked the EU to delay passage of the regulation, citing its broad scope. But the EU has so far declined to amend its rollout. EUDR is due to take effect on Dec 30, with a six-month grace period for small businesses.
“Despite numerous strong calls for delays and changes from producer countries and industry stakeholders,” Jefferies said it expects the regulation to “go ahead as planned”.
