"We are here to champion the English traditional arts – music, song, dance, storytelling, customs and traditions" … "And we're about developing. Folk is living, breathing and constantly being re-invented;" (From: The Sandman : Date: 18 Aug 17 - 02:31 PM presumably quoting EFDSS)

It could be interpreted that EFDDS are about promoting the "traditional art" of creating a folk song (whatever that is - and whether or not you believe that's possible) rather than promoting the preservation of existing songs and, as they say "Folk is living, breathing and constantly being re-invented;" they could argue that "creation of new folk songs" is part of their brief as part of the "living breathing reinvention".

Whether they are right or wrong to award these grants is perhaps a separate issue but I cannot see from what has been quoted that they are in breach of their stated aims.