Carbon Accounting Moves Into Core Financial Reporting

Regulators across 36 jurisdictions are now embedding emissions data into mandatory financial disclosure frameworks, and the pace is accelerating. Carbon has moved from the corporate social responsibility annex to the annual report, subject to the same rigour companies once reserved for revenue recognition and tax provisioning. For finance directors, investors and the accountancy profession, the implications are substantial: carbon accounting is no longer a reputational exercise but a compliance obligation, and one that carries growing liability risk for those who get the numbers wrong.

What Companies Actually Report

At its core, carbon accounting is the process of quantifying an organisation’s greenhouse gas emissions in a standardised unit, typically tonnes of carbon dioxide equivalent (CO2e). The dominant framework remains the GHG Protocol, developed by the World Resources Institute and the World Business Council for Sustainable Development, which sorts emissions into three categories that have become the lingua franca of climate disclosure.

Scope 1 captures direct emissions from sources a company owns or controls, while Scope 2 covers indirect emissions from purchased energy. Both are relatively straightforward to quantify from utility bills and fuel records, and most large companies have been reporting them for years.

Scope 3 is where the difficulty, and the real significance, lies. It encompasses all other indirect emissions across a company’s value chain, split into 15 categories that range from purchased goods and services to employee commuting, business travel, the use of sold products and their eventual disposal. According to CDP, Scope 3 emissions account for approximately three quarters of a typical company’s total footprint. For financial institutions, the figure is closer to 99%, because the emissions financed through lending and investment portfolios dwarf anything generated by office operations. The Science Based Targets initiative has found that 70% of all Scope 3 emissions reported to CDP originate in just two categories: purchased goods and services, and the use of sold products.

The data quality problem is not trivial. Most companies still rely on spend-based estimation for Scope 3, multiplying procurement expenditure by industry-average emission factors. The result cannot distinguish between a supplier investing in decarbonisation and one that has done nothing. A 2024 MIT report, drawing on more than 7,000 supply chain professionals across 80 countries, found organisations hamstrung by inconsistent data, incompatible methodologies and supplier fragmentation. PwC has observed that 80% of a company’s supply chain emissions can come from as few as a fifth of its suppliers, a concentration that offers a pragmatic starting point but also underscores how much current reporting rests on estimates rather than measured fact.

The Regulatory Landscape

The reporting landscape has tightened dramatically. In the UK, the Streamlined Energy and Carbon Reporting (SECR) framework requires large companies (those meeting at least two of: turnover above £36m, balance sheet exceeding £18m, or 250-plus employees) to disclose Scope 1 and 2 emissions, energy consumption and intensity ratios in their annual directors’ reports. High-emission sectors face additional obligations under the UK Emissions Trading Scheme, which imposes annual monitoring, reporting and allowance compliance.

Internationally, the picture has shifted from fragmented to convergent. The International Sustainability Standards Board (ISSB), housed within the IFRS Foundation, released IFRS S1 and IFRS S2 in June 2023. These standards absorbed the recommendations of the now-defunct Task Force on Climate-related Financial Disclosures (TCFD) and established a global baseline for sustainability-related financial disclosure. As of mid-2025, 36 jurisdictions representing over 60% of global GDP have either adopted the ISSB standards or are finalising steps to do so. Japan and Mexico formally adopted them in 2025. Hong Kong began requiring IFRS S2-aligned climate disclosures from January 2025 on a comply-or-explain basis, with Brazil following for listed companies from January 2026. In December 2025, the ISSB issued targeted amendments to IFRS S2 to ease implementation, effective from January 2027.

In Europe, the Corporate Sustainability Reporting Directive (CSRD) introduced the most granular requirements yet, demanding disclosure across all three emission scopes, transition plans and progress against reduction targets, underpinned by the European Sustainability Reporting Standards (ESRS). The directive requires limited assurance of sustainability data from the outset, with a planned escalation to reasonable assurance, the same standard applied to financial accounts.

For banks and asset managers, the Partnership for Carbon Accounting Financials (PCAF) provides sector-specific methodology. More than 700 financial institutions, representing over $100tn in financial assets, have committed to measuring financed emissions using the PCAF standard. Its December 2025 update expanded coverage to securitisations, structured products and sub-sovereign debt.

The Profession Responds

The regulatory surge has created a land grab in professional services. PwC designated ESG consulting as a core growth pillar, integrating carbon measurement into its assurance and advisory work. Deloitte built sector-specific sustainability teams for energy, financial services and manufacturing. EY and KPMG followed comparable paths, with KPMG publishing jurisdiction-by-jurisdiction guidance on ISSB adoption.

But the most revealing trend is how far down the profession the shift has travelled. Mid-tier and regional firms now recognise that their clients, many of them SMEs embedded in the supply chains of larger mandatory reporters, face indirect but unavoidable pressure to measure and disclose their emissions. When a FTSE 250 company starts requesting carbon data from its suppliers to compile its own Scope 3 inventory, the question lands on the desk of that supplier’s accountant.

Kreston Reeves, the B Corp-certified accountancy and advisory firm with offices across London, Kent and Sussex, illustrates the point well. The firm has built a dedicated ESG advisory and reporting practice spanning carbon footprint calculations, SECR compliance, materiality assessments, climate action planning and CSRD readiness. Under the leadership of James Peach, Partner and Head of Climate Action, Kreston Reeves partnered with Ecologi to provide clients with a free carbon accounting platform that translates financial data into an emissions profile, a shrewd move for a firm whose client base is weighted towards owner-managed businesses and mid-market enterprises lacking in-house sustainability teams. The firm achieved carbon neutrality in 2021, offsetting 1,616 tonnes of CO2e, and has since pivoted towards absolute emission reductions in pursuit of a net-zero target.

Kreston Reeves is not an outlier. Across the Kreston Global network, member firms in 115 countries face the same client demand. Grant Thornton, BDO and RSM have all expanded sustainability advisory capabilities, recognising that the mid-market is where much of the growth in carbon reporting will materialise as regulatory scope widens.

Technology and the Data Problem

The complexity of emissions measurement, particularly for Scope 3, has fuelled a thriving market in carbon accounting software. Persefoni, which has built deep integrations with PCAF’s methodology and partnerships with Deloitte and Bain, has positioned itself as the platform of choice for financial institutions needing audit-grade data. Watershed focuses on large corporates. Sweep, headquartered in France, counts L’Oréal and Burberry among its users. Normative provides a free calculator for smaller suppliers through the SME Climate Hub, and Greenly has carved a niche in mid-market accessibility.

These platforms are advancing rapidly. AI-powered data mapping automates the classification of spending against emission factors. Supplier engagement modules streamline primary Scope 3 data collection. Internal carbon pricing engines, such as those developed by Sinai, enable companies to assign monetary values to emissions by business unit, creating economic incentives that accelerate reduction.

Yet technology alone will not close the credibility gap. The shift towards primary, supplier-specific data is essential for defensible carbon reporting, but it demands collaboration, trust and standardisation across supply chains that span dozens of countries and regulatory regimes. And the stakes for getting it wrong are rising. As assurance requirements tighten under the CSRD and ISSB frameworks, emissions disclosures will increasingly be subject to the same legal scrutiny as financial statements. Companies that overstate their decarbonisation progress, whether through poor methodology or selective reporting, face not only reputational damage but potential liability under securities regulation. The spectre of “greenwashing” litigation, already visible in cases brought against major corporates in Europe and Australia, is concentrating minds in boardrooms and audit committees alike.

What This Means for Business

The convergence of carbon accounting with financial reporting will not reverse. Thirty-six jurisdictions are on board with ISSB standards. Assurance requirements are escalating. Investors increasingly treat emissions data as a proxy for transition risk, stranded asset exposure and management quality.

For companies that have not yet built internal measurement capabilities, the window for preparation is narrowing fast. For the accountancy profession, from the Big Four to regional firms like Kreston Reeves, the ability to measure, verify and report carbon data is becoming as fundamental to practice as tax compliance or statutory audit. The balance sheet now carries a column that did not exist a decade ago, and the regulators, investors and litigators paying attention to it are not going away.