GTF survey on due diligence finds SMEs to be performing well

Since the EU Timber Regulation was first adopted there has been much debate and some confusion as to the best approach to practicing due diligence. What does a good system look like? How much diligence should be practiced? How is risk assessed and suitably managed? In May and June 2015 GTF commissioned some analysis of a sample of European and producer-country small and medium-sized companies (SMEs) involved in the forest products trade. The detailed results of this research will be available for download from the GTF website in August, but some initial findings are ready to be shared now.

The first conclusion is that across the range of producer countries surveyed as well as in Europe the company size is not necessarily important when it comes to managing risk within supply chains. The very smallest companies are capable of implementing a system that works for them and should be able to meet the EUTR requirements. However, generally speaking larger companies among the SMEs do tend to perform slightly better in terms of due diligence – both in Europe and in producer countries.

Moreover, the best systems identified as a part of this survey have been developed by companies themselves, using all of the tools available such as trade association materials, dialogue with Competent Authorities, the text of the Regulation itself, NGO materials and simply talking to peers in the industry.

With reference to the European SMEs, those using an off-the-shelf due diligence system, such as those provided by Monitoring Organisations, delivered solid performance – but there are other options. Support from consultancies, for example, has been seen to be effective. Most companies appear to develop their own system, with results ranging from excellent to – in scattered instances – below a standard that could be described as due diligence.

GTF using local expertise interviewed 15 producer-country SMEs (in Ghana, Cameroon, Gabon, Democratic Republic of the Congo, Liberia and Vietnam) and 27 European companies for this survey. In Europe, 25 of the respondents claimed to have a due diligence system in place and two said they were developing such a system. In the producer countries, 14 of the respondents reported they had a system in place that ensures they only purchase legally harvested timber. One respondent claimed to be developing such a system.

The final report will provide detailed information about the methods and effectiveness of the companies’ due diligence systems in both regions as well as on the financial investments required to practice due diligence. One interesting finding here was that exporters have to invest considerably more than importers to ensure a reasonable level of legal and environmental compliance. They must consider domestic legislation (which is sometimes confused and contradictory) as well as the requirements of their customers who have to comply with the EUTR, the Lacey Act or the Australian Illegal Logging Prohibition Act.

With one exception all of the European companies interviewed welcomed the EU Timber Regulation. For many it has the potential to level the playing field and to legitimise their material. Many expressed a hope that the Regulation would be better implemented across the EU in a way that made it eradicate illegal wood, whilst still leaving room for legitimate operators.

Among the producer-country SMEs the consensus was that there was likely to be more regulation in export markets in the future, perhaps in more countries. The companies were split evenly between it would be easier to export in the future and it would be more difficult. Many felt that if the regulations remained stable it would be easier as compliance became more familiar to the exporters and to their customers.

The EU market was seen by a number of respondents as being difficult and the concern was that as the EU Timber Regulation was applied more firmly or revised it would continue to be a source of concern for exporters.

Five producer-country SMEs in the sample say they have considered new markets. However, the survey was not able to reveal if this consideration was purely based on meeting market-based legal requirements. Domestic and regional markets were mentioned, partly as these may become more profitable, and perhaps, partly because they are seen as less difficult to trade in.