Executive Summary

This report presents a case study on Indragiri Hulu District, a region dominated by oil palm plantations but historically linked to deforestation concerns over the past decades. The study assesses compliance with the European Union Deforestation Regulation (EUDR) to evaluate the sustainability of oil palm production in the district.

The findings reveal that 51% comply with EUDR Article 3 (a, b). Meanwhile, 49% are categorized as non-compliant due to missing land ownership documentation or being located in areas designated as forest areas by the Ministry of Environment and Forestry (2023). Notably, the majority of plots without land titles are owned by smallholders.

Achieving EUDR compliance offers significant advantages for exporters. It demonstrates a strong commitment to sustainability and environmental responsibility, enhancing business reputation and attracting environmentally conscious consumers. Additionally, compliance provides a competitive edge in the European market, where consumer demand for deforestation-free products continues to grow.

This study underscores the importance of regulatory alignment and sustainable land management to ensure long-term market access, environmental conservation, and economic viability in the palm oil industry.

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Introduction

The European Union Deforestation Regulation (EUDR) entered into force on 29 June 2023 to reduce the EU’s impact on global deforestation and forest degradation. Inovasi Digital has conducted compliance analysis of more than 3,671,589 plots throughout more than 3 countries, representing >20,473,975.09 hectares, and assessed >294 districts of >97 provinces/states.

An analysis of compliance with the EUDR was conducted on Indragiri Hulu District. Indragiri Hulu was chosen as a case study as it is a district that is dominated by oil palm but has been the focus of deforestation issues in the past decades. Below is the deforestation data from the EU database (Tropical Moist Forest).

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There is a significant presence of Indigenous Peoples, which means greater compliance with the EUDR.

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Sourced from the United Nations Permanent Forum on Indigenous Issues, Indigenous peoples are communities that have a historical continuity with pre-colonial societies and who consider themselves distinct from other sectors of the society now prevailing in those territories. They often maintain social, cultural, economic, and political traditions and institutions distinct from the dominant society or culture.

This EUDR compliance analysis employed a comprehensive methodology to evaluate the compliance of the district with EU Regulation 2023/1115 article 3 (a, b, c). Article 3 of the EUDR stipulates that products must be a. deforestation-free, b. comply with the relevant legislation of the country of production, c. ensure complete plot traceability with location information, and adhere to requirements for being deforestation-free, including risk assessment and risk mitigation. This article identified several key issues, including how to define deforestation in accordance with EUDR standards, how to develop plots for supply chain complexity, and how to implement effective risk mitigation measures.

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Methodology

The term “forest” that we use refers to the definition provided by the Food and Agriculture Organization of the United Nations (FAO), which is a land spanning more than 0.5 hectares with trees higher than 5 meters and a canopy cover of more than 10 %, or trees able to reach those thresholds in situ, excluding land that is predominantly under agricultural or urban land use.

Related to Article 3a, deforestation contributes significantly to climate change, biodiversity loss, and ecosystem degradation. The EU has positioned itself as a global leader in promoting sustainability, and the deforestation-free clause directly responds to increasing public and scientific concerns. This regulation aims to ensure that commodities and derived products entering the EU market are not linked to deforestation or forest degradation after December 31, 2020.

Article 3b is EUDR legality compliance, which ensures that companies adhere to EU regulations and the laws of the producing country, including land tenure, environmental protection, and labor rights. Compliance with national laws ensures that the land used for production is legitimately acquired and used, respecting the rights of landowners, including smallholders and indigenous peoples. This helps prevent land conflicts, human rights violations, illegal logging, corruption, and land grabbing or illegal occupation disputes.

Article 3c is about due diligence. Due diligence enables operators to identify risks such as deforestation, illegal land use, or lack of legal documentation; proactively mitigate these risks before they impact business; and ensure traceability to the plot level, as required by the EUDR. This strengthens the resilience and integrity of the supply chain.

Under the EUDR, the operator has the obligation to conduct due diligence directly. While third parties (e.g., consultants or data providers) can assist in collecting or analyzing information, the operator has the ultimate responsibility for compliance. This ensures accountability throughout the supply chain.

Compliance analysis is conducted to see whether plots have complied with the EUDR requirements on Article 3(a, b). Compliance analysis includes verifying plots via national databases and expert-driven identification of plots based on planting patterns via Inovasi Digital’s high-resolution satellite images and deforestation analysis. For deforestation-free analysis, the methodology used remote sensing, and the data used were the EU’s Tropical Moisture Forest data, RADD data, Inovasi Digital’s deforestation database, and digitized forest baseline for 2020 to identify forest loss or conversion to oil palm plantations.

Information for legality data is divided into 2: registered land plots and land plots based on field boundaries (unregistered land plots). This is due to the availability of business permit data via a national database. An assessment of overlapping plots with government-designated forest areas is also conducted to evaluate the legality status of land within forest zones. Plots with official legal documentation from the relevant authorities are still considered compliant, as such discrepancies may result from differences in spatial data provided by various government ministries. The methodology used to get legal data is spatial analysis using GIS software.

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Result

According to Inovasi Digital’s compliance analysis from December 2020 to December 2024, the result was that in Indragiri Hulu District, 155,008.52 ha of 305,758.22 ha, or 51% of plots, comply with EUDR Article 3 (a, b). Meanwhile, for non-compliant plots, the number stood at 150,749.70 ha of 305,758.22 ha, or 49%, due to missing land ownership or plots located in spatially designated forest areas, according to the Ministry of Environment and Forestry year 2023. The majority of plots without land titles belong to smallholders.

Compliance with regulations such as the European Union Deforestation Regulation (EUDR) is critically important for exporters and smallholders, especially when their land is located within or near areas designated as forests by the government. Smallholders or exporters may be considered illegal if they cultivate or operate on such land without proper permits or legal recognition. Under the EUDR, products sourced from such land would fail to meet legal compliance requirements, leading to

1. Ineligibility for export to the EU market
2. Possible legal sanctions in the country of origin
3. Loss of trust from buyers and trading partners

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For exporters, products originating from illegal or uncertified land will not be accepted in the European Union, which now enforces strict regulations on deforestation and legality. This could result in:

1. Rejection of shipments at EU ports
2. Loss of trade contracts with international buyers
3. Financial losses for the entire supply chain, including smallholders

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Plots located in forest areas but already having ownership permits, such as SHM and HGU in Indragiri Hulu District, were also found, covering an area of 60,825.28 ha, or 305,758.22, or 20%. To comply with the EUDR and subsequent exports to the EU market, these plots should obtain the forest release status from relevant ministries.

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Indragiri Hulu District was classified as a standard risk due to the high deforestation activities carried out by smallholders and the presence of indigenous peoples. Due to limited resources, unclear land rights, and lack of access to information, smallholders are sometimes involved in unintentional or illegal deforestation to expand their farms. To stop deforestation by smallholders while still supporting their livelihoods, a multi-stakeholder, inclusive, and sustainable approach is essential. Stopping deforestation by smallholders requires balancing environmental protection with social equity. It’s not about penalizing smallholders but empowering them—with knowledge, land rights, market access, and the tools to be part of a sustainable and legal supply chain. Smallholders can become key partners in forest conservation and climate resilience when appropriately supported.

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Conclusion

In conclusion, 49% of oil palm planted areas can be considered not fulfilling the legal requirements of the EUDR as they overlap with government forest designated areas. We highly recommend that operators in the EU who source from this area and the government collaborate for the inclusion of smallholder farmers by legalizing their production area as there is still 9 months until the implementation of the EUDR at the end of 2025.

Exporters, mills, and smallholders must proactively meet the legality requirement under the European Union Deforestation Regulation (EUDR) and avoid the risk of sourcing from illegally occupied or managed land, especially in or near forest areas. There are many actions to mitigate illegality risks concerning EUDR Compliance:

1. Regularly update land status data to reflectrecent policy changes or re-zonings.
2. Encourage and support smallholders to obtainvalid land tenure document.
3. Maintain up-to-date geolocation data and link itto land ownership documents.
4. Provide training and capacity building tosuppliers and smallholders on legality requirements under EUDR.
5. Third-party partners (e.g., Inovasi Digital) tosupport land verification and documentation
6. Store all documents and evidence in an organizedand traceable format (e.g., Agriplot Dashboard).
7. Ensure full traceability by maintaining a clearrecord of all documentation and land verification processes.

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