A “potential political failure” awaits the EU Corporate Sustainability Reporting Directive (CSRD), unless funding for the body tasked with drafting its standards is increased – that’s the stark message from an open letter to the European Commission.

Issued by Accountancy Europe on behalf of more than 20 private sector and civil-society stakeholders in the European Financial Reporting Advisory Group (EFRAG), the 26 April letter warns that public funding currently provided to EFRAG is “disconnected” from the EU’s ambitions for CSRD, as well as the tasks that the directive requires the body to perform.

Despite the resource challenges and extreme time pressures that EFRAG faces, the letter notes, the organisation successfully delivered the first set of draft European Sustainability Reporting Standards (ESRS) to the Commission in November last year. In the signatories’ view, that milestone confirms that EFRAG, “with its commitment to public good and diverse membership”, is the right organisation for the job.

However, they write: “EFRAG remains dramatically underfunded and continues being forced to operate in unacceptable working conditions and to heavily rely on donated staff while operating under unrealistic deadlines.”

Dramatic consequences

For example, the letter points out, the Commission has “repeatedly added requests to EFRAG to undertake projects beyond those strictly mandated by the CSRD” – with that extra work including the production of special guidance on the first set of draft ESRS and the creation of an XBRL taxonomy for the standards. The letter continues: “While these are vital additional tasks, and EFRAG is the right organisation to do them, no additional public funding has been provided, making the underfunding problem even worse.”

For the signatories, EFRAG’s core role is paramount: robust and implementable ESRS, they argue, underpin the success of the CSRD – which in turn leads to the achievement of broader environmental, social and governance goals across Europe.

But at present, they write, the funding gap poses “dramatic consequences” for EFRAG’s ability to recruit the expertise it needs, because talent is scarce and in high demand in a very competitive market.

As such, they stress, the issue has negatively impacted the work of EFRAG’s financial reporting pillar, which has had to reduce its activities linked to the International Financial Reporting Standards endorsement advice mandate. In parallel, the letter states: “It also creates significant risks for governance, management, independence, quality and due process across the organisation.”

It warns: “Stakeholders’ repeated calls for proper funding in EFRAG’s sustainability pillar have been disregarded so far – but the situation has now reached a point that seriously risks undermining the CSRD, resulting in a potential political failure.”

Based on EFRAG’s current budget shortfalls and the budgets of other, international standard setters, the signatories estimate that additional, annual funding of €4m to €6m is required, “to ensure the EFRAG sustainability reporting pillar is able to recruit the necessary expertise and run a robust and qualitative due process to deliver the tasks in the CSRD”.

Strong confusion

It is not Accountancy Europe’s only recent intervention on EFRAG-related matters. Days before issuing its funding plea, the organisation wrote to Commission President Ursula von der Leyen and Financial Services Commissioner Mairead McGuinness, in response to speeches they made in March on the need to rationalise and simplify reporting requirements in the green, digital and economic fields.

In particular, the 21 April letter urges that EFRAG’s work on the ESRS should be viewed through the lens of the EU’s Better Regulation agenda: a strategic initiative that aims to ensure that existing or upcoming legislative schemes are not rushed, but are purpose driven, quality controlled and subject to field testing prior to implementation.

Citing an instance of counterproductive haste, the letter states: “The Commission recently asked EFRAG to prioritise implementation guidance on sector-agnostic standards over sector-specific ones, without clarifying when to restart the latter. Lack of information and transparency can create strong confusion among stakeholders and lead to wrong conclusions on whether policy objectives have been abandoned.”

In addition, it points out, the first set of draft ESRS is not being field-tested, which is “an important step in every standard-setting process”.

ICAEW Head of European Policy Susanna Di Feliciantonio says: “Supporting the successful implementation of the CSRD is a key focus for the European accountancy profession. The spotlight is understandably on the first set of ESRS, due to be presented as delegated acts for a short consultation period by the Commission. It is equally clear that EFRAG needs to be properly funded if it is to deliver the mandate entrusted to it in the CSRD.”