‘Hell on earth’: Inside EFRAG’s sustainability standards development drive

Individuals involved in EFRAG’s development of the recently adopted ESRS tell RI of the many challenges they faced.

To be left waiting is vexing – but imagine how much more vexing it would be to wait eight months for a formal response from someone who has been relying on your expertise for intensive unpaid work. It has emerged that this is the position that members of the European Financial Reporting Advisory Group (EFRAG) sustainability pillar have found themselves in.  

Ten individuals – all involved in developing the EU’s recently adopted European Sustainability Reporting Standards (ESRS) – wrote a letter to EFRAG’s CEO Saskia Slomp, as well as the president and vice-president of the standard body’s administrative board, in November 2022.  

The letter, seen by Responsible Investor, states that it is “important to raise the challenges we have experienced as involved stakeholders in contributing to the development of high-quality ESRS”. 

“The root causes are due to EFRAG’s insufficient resources, gaps in the organisation of the standard-setting processes and lack of effective representation of civil society’s expertise in the impact dimension of sustainability at all levels throughout EFRAG’s sustainability pillar,” it added.  


The EU’s Corporate Sustainability Reporting Directive (CRSD) is the biggest push for mandatory wide-ranging sustainability disclosures to date, with more than 50,000 companies to be covered. 

The first reporting period for CSRD – which applies to the 11,000 or so large EU firms that already report under the bloc’s existing disclosure regime, the Non-Financial Reporting Directive (NFRD) – begins in January. 

Underpinning the CSRD are the technical standards. The first set of sector-agnostic European Sustainability Reporting Standards (ESRS) were approved by the European Commission in July, but with a significant change from the original proposal put forward by EFRAG.

Originally, climate-related reporting as well as reporting that stems from other EU legislation would be mandatory, but a substantial shift in approach saw virtually all disclosure metrics become subject to materiality assessments.  

Further attempts to water down the ESRS failed last month when MEPs rejected a resolution put to the European Parliament.  

The EU did, however, announce plans to postpone the deadline to adopt sector-specific ESRS by two years.

The signatories called for three “reforms” they said were needed to deliver “an ambitious and positively impactful” ESRS. These are: addressing EFRAG’s lack of funding and securing more funds from the EU; a more comprehensive perspective on diversity in recruiting new members; and a call for improved governance.  

The letter is dated 16 November 2022 – exactly one week before EFRAG published its draft ESRS outlining 82 disclosure categories with more than 1,000 data points for companies to report on. This was the result of intensive work by the standards body to almost halve the number of disclosure requirements it had set out in an initial exposure draft in late April, in response to market feedback.  

“A serious accountability process would not take that long to have a response – that in itself is an indicator of bad governance”

Despite this, it took the EFRAG administrative board eight months to formally respond – RI has seen its response dated 9 June 2023.  

While this acknowledges some concerns raised and suggests the board had addressed some details of the letter in meetings, RI understands signatories were broadly underwhelmed with the response and the time it took to receive it.  

“It’s another signal of weak governance,” said one person involved in the process. “A serious accountability process would not take that long to have a response – that in itself is an indicator of bad governance.”  

RI has spoken to several signatories of the letter on condition of anonymity, as the letter is not public. They were keen to stress they had not wanted to raise their concerns to the press prior to the final adoption of the ESRS, fearing that it could have derailed progress.  

RI spoke to individuals involved in developing the ESRS who did not sign the letter, as well as numerous market observers about their concerns around EFRAG.  

They all flagged issues around EFRAG’s lack of sustainability expertise, lack of funding and governance issues.  

At one meeting, an EFRAG administrative board member stated that they had sustainability experience because they are a father, two people said. 

Several people highlighted that members within the sustainability pillar without funding had to fit the demanding workloads  around their day jobs. One described the last 18 months as “hell on earth for most of the staff”.

But the overarching concern of those involved in the process was what they see as a combination of two challenges: EFRAG not being fully geared up to take on the job of developing sustainability standards, and the European Commission’s decision to mandate it to do so in a very short space of time without supporting it sufficiently.   

“I believe that those at the commission and people at EFRAG working on this initially didn’t necessarily anticipate how difficult this may be,” said one source. “Most of the people [involved with] EFRAG are basically accountants and auditors. These people do not necessarily have prior deep understanding of ESG issues to fully appreciate what this means.” 

This was echoed by another person, who did not sign the November letter but agreed with the message. “We want to support EFRAG but we’re not going to be engaged in an initiative that is set to fail – that was the tone and underlying message. It’s also a criticism of not only EFRAG but the commission – you say you want standards, but you don’t put your money where your mouth is.”   

Suitability and administrative board 

Questions were raised at the time about EFRAG’s suitability to take on the work of developing corporate sustainability standards, given that the body was not a standard setter, let alone a specialist on the subject.   

Prior to taking on the sustainability workload, its primary role was providing the European Commission with advice on matters related to financial reporting standards. Following the mandate, EFRAG created a dedicated sustainability pillar to oversee the work, which grew out of an existing European Corporate Reporting Lab, created in 2018 as part of the commission’s Sustainable Action Plan.  

Unlike EFRAG’s pre-existing financial reporting pillar, the newer sustainability one attracts notably less funding from private sector members and national standard setters, according to EFRAG’s 2022 annual report. 

A key concern flagged in the letter stems from the lack of sustainability expertise on EFRAG’s administrative board, which is responsible for the administration and finance for both the financial and sustainability reporting pillars.  

When EFRAG was reformed, and the Sustainability Reporting Board (SRB) and Sustainability Reporting Technical Expert Group (TEG) were created, minimal changes were made to the administrative board – it simply appointed one civil society representative with sustainability experience. The November 2022 letter calls for EFRAG’s governance structure to strike “a fair balance” between financial and sustainability representation in all its bodies, including the administrative board.  

This has not happened, much to the frustration of some participants in the sustainability pillar.  

One person told RI that the lack of serious reform to EFRAG’s administrative board means that it no longer reflects the work of the body, given the impact, relevance and scale of the work involved in developing the bloc’s sustainability standards.  “What can you really do with one seat?” another person said. “You need more people with sustainability expertise for balance.” 

Having a more evenly represented administrative board is important despite the board not being directly involved in developing the standards, the person continued. This is because it “sets the tone for the overall governance” of EFRAG. 

All people contacted by RI raised concerns about EFRAG’s governance, particularly during the period when the first set of ESRS was being drafted in 2022. Some even said the governance being perceived as poor was a barrier to raising more external funding for EFRAG from charities and foundations.  

“It was really high pressure,” one person said. “In that context, we skipped some of the open meetings, due process, announcement of agendas and all that – these were really some governance issues.”  

In its response to the November 2022 letter, EFRAG acknowledged these concerns. It said that, amid the “very tight deadlines which were not under the control of EFRAG”, due process procedures were followed “to the extent feasible” but that “in some cases pragmatic short cuts had to be taken”.

It added that since 2023 it has made “substantial efforts” to improve the situation in the sustainability reporting pillar. 

Lack of funding 

Funding, or the absence of it, was something that came up in most conversations and has been acknowledged as an issue by EFRAG itself both in its response to the letter to the volunteers and in its 2022 annual report.

One observer notes the irony that a body that has publicly extolled its leadership status in corporate sustainability reporting was so poorly funded that it was “held together by a piece of string”.     

According to EFRAG’s 2022 annual review, trade bodies such as Business Europe give substantially smaller contributions to EFRAG’s sustainability pillar than they do for its financial reporting pillar. The same is true for the national accounting standard bodies for Germany and France.   

The funding shortfall led to EFRAG reportedly going cap in hand to several foundations. According to two sources familiar with the issue, however, EFRAG was rebuffed, with some prospective funders raising concerns about the body’s governance and others expressing a preference for the International Sustainability Standards Board (ISSB).  

These pecuniary issues led to practical ones. RI was told that EFRAG’s staff are “overworked and overburdened”, which led to “inefficiencies”, adding to the already strained working conditions.   

According to a recently published document by the commission, EFRAG’s funding fell €50,000 short of its expenses in 2022.  

In the November letter to EFRAG, the sustainability pillar members called for “an increase in EFRAG’s overall financing by increasing the funding coming from the commission to at least 75 percent of the total budget”. According to the recent document from the commission, it provided 60 percent of EFRAG’s funding in 2022.    

A spokesperson for the commission told RI that it has “very substantially increased” its financial contribution to EFRAG “to reflect the task of developing draft ESRS”. 

“Specifically, it has increased the EU funding for EFRAG’s work from €3.56 million for 2021, to €4.46 million for 2022 and to €6.25 million for 2023: a 75 percent increase over the period,” the spokesperson said.

It is a bizarre setup that the standard-setting body is membership based. Money is not for free – those who pay, they pay because they want more influence”  

They added that, to help overcome the “relatively low level of funding from EFRAG’s member organisations for ESRS development”, the commission has increased its co-financing from 2023. The latter now covers 90 percent of the costs “associated to EFRAG’s work in setting ESRS standards”.  

More funding from the commission was urged in part to dilute the influence of other groups paying to participate in the development standards.  

The perceived delay in getting additional funding, one person speculates, might have been partly due to “forces who didn’t wish EFRAG success”.   

Several people pointed to political opposition to the standards being developed by EFRAG, mostly emanating from German political circles.  

It was a German MEP who led the unsuccessful motion to water down the ESRS last month. Ahead of that vote, ISSB chair Emmanuel Faber launched an unprecedented attack on “double materiality”, the philosophical underpinning of the EU’s corporate disclosure regime.   

Pushing back against the suggestion of orchestration, one person nonetheless told RI that they believe there are connections.

Another person speculated that EFRAG’s administrative board might be a place where some favoured the less onerous standards being developed by the ISSB over the ESRS. Some people within EFRAG were “quite critical” of it taking up the sustainability reporting work at all, RI was also told.

Questions were also raised over how the budget was spent by EFRAG, particularly the lack of compensation for the work by everyone within the sustainability pillar except for the SRB and TEG chairs – a situation which “should never happen in this day and age”, according to one person involved.     

Not even travel expenses were covered by EFRAG. In its June response, the body noted that, at the December meeting of the EFRAG general assembly, it was agreed “for individual cases to sponsor travel costs to enable impact organisations in EFRAG governance bodies to participate in physical meetings in the EFRAG offices in Brussels”.  

Unhealthy dynamic on working groups 

Last month, EFRAG issued a call for candidates for the TEG as part of a planned rotation. People with NGO and investor backgrounds were particularly encouraged to apply.  

RI was told that recruiting the right people is likely to be tough, though, given the time commitment – both in terms of duration and intensity – involved, the lack of compensation and organisational issues.    

Those contributing to the TEG, which drafted the technical standards, were probably the most overworked, according to one person, who used the term “burned out” to describe the experience of members. Another person added that participation in the TEG dropped off over time.  

As with EFRAG’s administrative board and SRB, RI was told that the TEG suffered from under-representation of civil society and investors.   

Two people also flagged that it was often not the sustainability experts within companies that were represented on the TEG and SRB.   

The latter has a powerful role in the making of the ESRS. While the TEG drafts the standards, the SRB is responsible for EFRAG’s final reporting positions and is also tasked with “ensuring connectivity” between financial and sustainability reporting.  

The lack of sustainability expertise displayed by many of the SRB members was, again, flagged by everyone RI spoke to for this article. Corporate and national standard setter representatives with little sustainability expertise engaging with the significantly fewer not-for-profit and other sustainability-focused members within it created an “unhealthy dynamic” to the discussions, according to one participant.  

Another participant went further, commenting that when talking about sustainability with some SRB members “you’d lose them”.  

Notably, the group is composed only of EFRAG member representatives, up to nine seats of which are reserved for national standards setters, up to eight for stakeholder organisations, and five for civil society.  

The member representative requirement of the SRB means that, effectively, those on the board have to pay for the privilege of undertaking unpaid work, one person said. This makes it a high barrier to entry for NGOs and sustainability-focused investors and companies, said several people.  

Indeed, only one investor – Amundi – is represented on the group. Most seats on the board are held by big business associations and accounting professionals, as well as national standard setters. 

It is a bizarre setup that  the standard setting body is membership-based,” said one person. “Money is not for free. Those who pay, they pay because they want more influence.”  

That influence would often be used to push for less strict standards and fewer reporting requirements, several people said.  

One such example mentioned by a participant was the listed company industry association EuropeanIssuers, which is a member of EFRAG’s sustainability pillar but not the financial reporting one.  

“I believe that those at the commission and people at EFRAG working on this initially didn’t necessarily anticipate how difficult this may be”

The association said in its response to the commission’s ESRS consultation that it welcomed changes to the original EFRAG draft, including the shift to materiality assessments for most indicators – disliked by many investors and NGOs – in order to avoid “a time-consuming and costly compliance exercise that would have overloaded sustainability reports with irrelevant information”.  

Another example highlighted is BusinessEurope, a member of both the sustainability and financial pillars. In its consultation response, the group also welcomed the shift to materiality assessments, additional phase-ins and completely voluntary disclosures, while noting that compliance will still be burdensome, costly and challenging.

A spokesperson for EuropeanIssuers reiterated its support for materiality assessment guidance. “Disclosure requirements should fulfil the needs of financing the transition towards a greener digital and innovative economy without undermining the competitiveness of the industry,” they told RI.

BusinessEurope’s spokesperson added that it has been focused on ensuring “more workable reporting standards for preparers and users alike, where indeed there are fewer reporting requirements to reduce the reporting burden on companies as well as ensuring that only material information has to be disclosed.” 

The challenging dynamic in the group, combined with the ESRS draft deadline, meant 2022 was “very difficult”, said one participant. “There were times when we had a meeting in the evening and then the chair would say, ok, we didn’t finish so we’ll meet again tomorrow at 8am.”  

And while some things have improved, two SRB members both described the working conditions as “difficult” even after ESRS adoption.  

One said the group is running into similar issues now, when it is in the process of finalising standards for listed SMEs. They described corporate representatives as saying: “How many data points? That’s too many – cut, cut, cut!” They also alleged political motivations from members who are using the reporting burden argument to remove fundamental indicators they do not want to report on while endorsing more peripheral ones. 

“It’s quite frustrating because I think, unfortunately, lobbyists are misusing the SME argument. But these are companies with securities on listed markets. We’re not talking about corner shops. We’re talking about companies that maybe have 248 employees.”  

Political dimension and global standards push 

The wider political context was also highlighted by one person RI spoke with. The finalisation of the sector-agnostic ESRS standards has coincided with the end of a political cycle in Europe. This means that high-ranking people within bodies such as the European Commission, with an eye on re-election, are more sensitive to the wishes of corporates.  

In March, president Ursula von der Leyen said the commission would seek to reduce reporting requirements on companies by 25 percent.

One person told RI that they believed business associations saw this as a “golden opportunity” to push back against the emerging sustainability disclosure regime.  

In June, the commission announced that all requirements under ESRS would be subject to materiality assessments. The decision marked a significant departure from the original plan put forward by EFRAG, in which all climate-related reporting as well as reporting that stems from other EU legislation – such as the indicators relevant to its anti-greenwashing SFDR regime – would be mandatory.     

There is also one key global development that many think weighed on EFRAG’s ability to smoothly roll out the EU’s standards. Officially announced at COP26 in November 2021 to create a “comprehensive global baseline” of sustainability disclosures, the ISSB rapidly developed its standards. The first two, based on single materiality, were published in June.

It is clear that many reporting organisations prefer the ISSB standards over the ESRS. (This is evidenced in a raft of consultation responses during the development of both standards.)

But what has created a difficult dynamic for those in EFRAG’s sustainability pillar is that some individuals closely involved with the EU standards body have praised the ISSB – raising questions over whether people within the organisation actually favoured the global standards over the EU’s own double materiality ones.  

A name mentioned by several people was Georg Lanfermann, the president of German standard setter DRSC/ASCG and a member of the EFRAG administrative board. Lanfermann has on several occasions praised the ISSB and Germany’s support of global sustainability standards (the ISSB is headquartered in Frankfurt). At the same time, the DSRC in January this year referred to “fatal flaws” or “serious problematic issues in relation to the ESRS”.    

The rapid development of the ISSB and its first two standards has also likely impacted EFRAG’s access to funding from both governments and national standards setters – some of which fund both EFRAG and ISSB – and third parties like NGOs and foundations, several people said.  

Several people also said they believe the commission is effectively funding the ISSB through supporting the IFRS Foundation, and that they perceive this as an issue for EFRAG’s sustainability efforts. However, a commission spokesperson said that its operating grant to the IFRS “does not provide funding for the ISSB on sustainability reporting standards, but only to IFRS accounting standard setting by the IASB”. In 2022, the commission provided a €3.85 million grant to the IFRS Foundation.  

Next steps  

The commission’s commitment to fund the lion’s share of EFRAG’s sustainability work will likely be welcomed.  

But for some, it could be too little too late, given that the foundations for the standards have already been laid. Upcoming work will focus on implementation guidance and sector standards.  

It also remains to be seen how much goodwill EFRAG has used up in the development of the sector-agnostic standards, given that it will have to rely on outside expertise for the future work of its sustainability pillar.   

The fact that it has not responded when contacted for comment numerous times by RI might not fill those invested in the development of the EU’s corporate sustainability reporting standards with hope that things are likely to change soon.   

One industry observer sees an even more fundamental issue with EFRAG developing the ESRS, however, describing the public-private funding model of EFRAG as a “major tactical flaw”. The implementation of the standards will be a further test, they said. “Time will tell whether we’ve sown the seeds of our own demise.” 

The commission at least expressed gratitude to the “many people who contributed to this important process”. Its spokesperson celebrated EFRAG’s successful development of the ESRS “against a very tight timetable”.

See RI’s previous coverage:  

Are companies ready for CSRD reporting and materiality assessments? 

Auditing uncertainty: Are assurers prepared for CSRD? 

Materiality misalignment: Growing concerns around SFDR-ESRS workability