Blockchain for Deforestation-free Supply Chains

The main cause of global deforestation and forest degradation processes is the use of ever greater swathes of agricultural land to produce raw materials such as soybeans, beef, palm oil, wood, cocoa, rubber and coffee. As one of the biggest economies and consumers of these raw materials, the EU is a major contributor to global deforestation and forest degradation – in fact, it is the second largest exporter and importer of goods in the world. Its awareness of this responsibility has led it to adopt the EU Deforestation Regulation (EUDR) on deforestation-free agricultural supply chains, which entered into force on June 29, 2023. The regulation obliges companies to comply with due diligence requirements for reducing global deforestation. The “tree cover status” of agricultural production land as of the reference date of December 31, 2020 is the crucial factor here. To be able to import, export or distribute relevant raw materials and products made from them, companies must provide a full disclosure of the extent to which they are affected by the EUDR in terms of their products and in what capacity (i.e., as a distributor or retailer). The purpose of the EUDR is to ensure that raw materials that have been identified as critical and certain products that are manufactured thereof (such as leather, chocolate and furniture) and sold on EU markets do not contribute to deforestation or forest degradation, either in the EU or anywhere else in the world. From now on, the EU intends to only manufacture and consume “deforestation-free” raw materials and products.  

Implementing the deforestation regulation is a complex process, requiring transparent recording and processing of large data volumes across the entire supply chain for all goods, including intermediate products. This process poses enormous challenges for companies. At many stages along the affected supply chains, this information currently is either not available at all or is not available in sufficient quantities or with adequate levels of quality, reliability, tamper resistance or manageability. If a company is impacted by risks associated with certain countries or if their products fall within the controlled categories mentioned above, they will be subject to individual inspections of all their suppliers and production spaces. The EUDR also calls for an individual risk analysis and the introduction of risk mitigation measures. As such, new technical concepts and solution methodologies will be needed before the regulation takes effect on December 30, 2024, in order to support the affected companies in their efforts to meet the EUDR requirements. This is the starting point for Fraunhofer IML and its partners in the pilot project ForestGuard. The highly practical solution proposal provides companies with a way of feeding all the data results from previous analyses into one place and merge them across multiple supply chain stages while maintaining full tamper resistance and ensuring traceability. To do this, ForestGuard incorporates data from different actors, stakeholders and sources along the supply chains. This data will be consolidated in a structured way in order to ensure the transparency necessary for fulfilling the EUDR due diligence requirements, while still respecting data sovereignty. The research project is funded by the German Federal Ministry for the Environment, Nature Conservation, Nuclear Safety and Consumer Protection (BMUV), as part of the Export Initiative Environmental Protection (EXI). The project started on November 1, 2023 and will run for 15 months. 

ForestGuard is a blockchain-based open-source solution for submitting (uploading) and managing (tracing across multiple stages) proof that products are deforestation free. The relevant data can be provided by users, traced across multiple supply chain stages, even in the case of mixed batches, and made available to third parties (both for display and download). Relevant data includes a proof of ownership, proof of freedom from deforestation, geodata, a description of the goods (e.g., quantity or degree of processing of the product in question) and – if available – certificates (Fairtrade, Fair Globe, etc.). To this end, the research team is combining blockchain with other technologies, such as the internet of things or data from geographical information systems. Implementing blockchain technology creates a Single Point of Truth (SPoT) and ensures unchanging data integrity, while access control enables targeted insights for companies and government agencies. Opting for an open-source solution also increases the system’s scalability. Fraunhofer IML is using a generic research approach so that the supply chains for all the affected raw materials and goods can be mapped, while also including adjustments for the individual circumstances. “With ForestGuard, we want to create a model for other supply chains and regulatory requirements, such as the German Supply Chain Act (Lieferkettensorgfaltspflichtengesetz, LkSG),” explains Roman Koller, research associate at Fraunhofer IML and project manager of ForestGuard. “The project is also laying important groundwork for supply chain financing and investment financing for sustainability projects – especially in producer countries at the starting point of supply chains.”

As the researchers needed to develop ForestGuard under real-world conditions, they chose a coffee supply chain starting in Peru as an example for the project. By incorporating data from every stage of the chain – from plantation to retail – the project team aims to ensure transparency and traceability of EUDR-relevant information along the coffee supply chain. The functions of ForestGuard include merging and splitting batches, verification management, process tracking, accounting for harvests and producer management. An implementation proposal with the corresponding functionalities is being developed in collaboration with major industry partners, including the REWE Group and Schirmer Kaffee. “Our project partners are all directly or indirectly affected by the EUDR. As such, they are under significant pressure to take action, but they are also highly motivated to play their part in developing new solutions,” says Roman Koller. “They are giving us the opportunity to work very closely with the process – literally, from the field to the supermarket shelf – which means we can ensure the applicability of our development and its subsequent transfer into practice.” The support provided by the BMUV and this close collaboration with experienced industry partners highlight ForestGuard’s relevance in the context of global environmental changes and the great pressure the EUDR is placing on companies to drive greater sustainability and transparency in supply chains. “Transparent supply chains are the foundation of our fight against climate change and deforestation,” says Dr. Klaus Wirbel, member of the Sustainable Finance Advisory Committee of the German Federal Government and Head of Finance and Group Treasury at the REWE Group. “In this pilot project, we are gathering important insights into how we can manage the resulting data volumes and flows efficiently and transparently. We will then be able to pass on these findings – and that would be major progress.”

The first phase of the project focused on analysis and conceptualization. During this stage, the researchers set out the domain-specific, technical and regulatory requirements for a blockchain-based approach to implementing the EUDR from the perspective of the stakeholders concerned and developed a proposal for the program flow chart, software architecture and data model, and a description of the interfaces. Next came the second project phase, which started in May 2024 and includes the implementation of the design, a pilot project and validation with the project partners. The research team is currently developing and implementing an initial functional prototype to demonstrate the effectiveness of the solution proposal. This will be followed by a pilot project, whereby the MVP will be applied in the coffee supply chain example – a mission that will take the researchers to a coffee cooperative in Peru. They want to get an idea of the situation of local farmers, observe the harvest and logistics processes there and find out how data is collected and managed on site. Once the team has completed the pilot phase and evaluated the results, they will investigate the extent to which ForestGuard can be transferred to other supply chains. They are planning to make the open-source solution available to all companies affected by the EUDR by the end of the year.

Until the tool is ready, not only the Dortmund-based researchers, but also all manufacturers, affected companies and the EU itself, will have to take on a number of challenges and work at high speed and with immense effort to launch EUDR-compliant solutions within this tight timeframe. The EU information system where companies are supposed to enter their data will not commence operations until the end of 2024 – i.e., at the same time that the regulation will enter into effect. The EUDR itself has yet to be finalized. For example, the specifications of the interface for the EU information system where due diligence declarations are to be submitted were not published until May 2024. The EU’s controversial assessment of country risks is also set to follow later. However, companies cannot assess risks in their supply chain and take measures (such as new contracts/suppliers) to meet the EUDR requirements without this vital information. In addition, data availability and digitalization levels differ widely across the various countries of origin. In many of these countries, recording of field and land ownership has yet to be completed. It remains exciting.