The impact of EU Deforestation Regulation on real estate

In a bid to tackle global deforestation, the EU has introduced stringent regulation covering certain raw materials, including wood. Christiane Conrads, Michelle Sauer and Luisa Felgenträger report.

In the real estate sector, wood is increasingly being viewed as an alternative, sustainable building material due to its many benefits, including its ability to capture CO2.

However, a new EU regulation could significantly impact the availability and cost of wood, as it imposes stricter requirements on the sourcing and traceability of this raw material.

Background and objective

The new rules on the availability on the EU market of certain raw materials and products associated with deforestation and forest degradation and their export from the Union, are known as the EU Deforestation Regulation (EUDR) and will apply from 30 December 2024.

The EUDR represents one of the world’s strictest regulations to combat deforestation and reflects the EU’s increasing efforts to address global environmental issues through economic measures.

EUDR aims to regulate the import and trade of products associated with deforestation. In light of the fact that the EU market contributes the most to deforestation worldwide after China, and deforestation accounts for 11% of greenhouse gas emissions, the regulation is designed to combat deforestation and forest degradation worldwide. It is primarily intended to contribute to the protection of forests and biodiversity.

The regulation particularly affects goods and products that are placed on the EU market, made available in the EU, or exported from the EU. In addition to cattle, cocoa, coffee, oil palms, rubber and soya, the EUDR names wood as a relevant raw material.

By requiring companies to prove that their supply chains are deforestation-free, the regulation ensures greater transparency and traceability.

The European Commission has already announced that it is considering extending the regulation and protection to goods and products from other endangered ecosystems, such as wetlands, in the coming years if necessary.

What the regulation means in practice

Companies importing cattle, cocoa, coffee, oil palm, rubber, soy, or wood, as well as products made from these materials, into the EU must prove that their products comply with the regulation’s requirements. They are also required to provide geo-referenced data demonstrating that the raw materials do not originate from recently deforested areas. In this context, companies must submit detailed reports on their supply chains and the actions taken to ensure compliance with the regulation.

A distinction is made between “operators” and “traders”, with the former facing more extensive obligations.

However, both groups may only place or make products available on the market if they meet the regulation’s requirements and pose no deforestation risk, or if any such risk is deemed “negligible”.

According to Article 3 of the EUDR, relevant raw materials and products may only be placed on the market or exported if all of the following conditions are met:

• They are deforestation-free,
• They have been produced in accordance with the applicable laws of the country of origin; and
• A due diligence statement has been provided.

Under the regulation, deforestation is defined as the conversion of forested areas – specifically, areas larger than 0.5ha with trees over 5m tall and a canopy cover exceeding 10%, or with trees capable of reaching these thresholds on site – into agricultural land. Structural changes in forest cover are considered forest degradation.

Relevant products that contain wood or are produced using wood are considered deforestation-free if the wood was harvested from the forest without causing forest degradation after 31 December 2020.

Christiane Conrads is a Partner, Global Real Estate ESG Leader, at PwC; Michelle Sauer and Luisa Felgenträger are in the Real Estate Sustainability Services department at PwC

EUDR: implications for real estate

Procurement processes and material selection

• It must be ensured that none of the materials used are prohibited under the regulation.
• In future, certified materials such as FSC- or PEFC-certified wood may be preferred.

Data management

• Mechanisms must be implemented to ensure the traceability of the materials used and to document compliance with the regulation
• Monitoring of the entire supply chain
• The way supply chains are managed and monitored may change in the future.
• It may be necessary to switch to more sustainable suppliers, which could result in higher costs.

Increasing demand for wood alongside a declining wood supply

• Scientists from WWF estimate that based on consumption trends in recent years, the demand for wood could grow by up to 28% by 2050
• At the same time, the impacts of climate change, including wildfires and pests, could lead to a reduction in the available wood supply by up to 35%, according to the WWF.

The EUDR presents an additional risk for the real estate industry.

• Non-compliance with EUDR standards can result in fines and damage to a company’s reputation.