Blog

Below, we will explore the new disclosure paradigm, focusing on the structural challenges of GHG accounting, the operational risks of underreporting, and the frameworks that are setting new expectations. It offers detailed guidance on how businesses can build credible, multi-scope carbon inventories, align with evolving global standards, and avoid the reputational and compliance risks associated with greenwashing.

1. Why Carbon Disclosure Standards Are Tightening

1.1 From Voluntary Reporting to Regulatory Obligation

Historically, carbon reporting was largely voluntary—conducted through sustainability reports or corporate websites with limited verification. Today, regulatory bodies have formalized expectations:

• CSRD (EU): Requires Scope 1, 2, and 3 emissions disclosure under ESRS standards, with third-party assurance.
• IFRS S2 (ISSB): Mandates climate-related disclosures for listed companies in >50 jurisdictions.
• SEC Climate Disclosure Rule (US): Requires material Scope 1 and 2 disclosures, with proposed inclusion of Scope 3 in certain cases.
• UK & Canada: Implementing mandatory climate-related financial risk reporting aligned with TCFD.

These developments reflect the consensus that carbon is now a financially material risk, subject to audit, assurance, and performance evaluation—just like any financial metric.

1.2 Market Forces Reinforcing Regulation

Beyond legal mandates, market dynamics are also driving stricter disclosure:

• Institutional investors are increasingly factoring carbon intensity into portfolio screening.
• Customers (especially B2B buyers) demand emissions transparency across the value chain.
• Insurers are pricing climate exposure into coverage terms and premiums.
• Rating agencies and ESG indices penalize opaque or incomplete disclosures.

Together, these forces are making carbon disclosure an operational necessity—not just a sustainability gesture.

2. Understanding Scope 1, 2, and 3 Emissions

Transparent carbon accounting depends on accurate classification of emissions under the Greenhouse Gas (GHG) Protocol, which divides emissions into three scopes:

2.1 Scope 1: Direct Emissions

These include GHGs released from owned or controlled sources, such as:

• Company vehicles and fleets
• On-site fuel combustion (boilers, furnaces)
• Process emissions from industrial activity

These are typically the most visible and easiest to quantify, but often represent only a small share of total emissions for service-based companies.

2.2 Scope 2: Indirect Energy Emissions

These are indirect emissions from the generation of purchased electricity, steam, heating, or cooling consumed by the reporting company.

• Scope 2 is calculated using both location-based (grid average) and market-based (supplier-specific) emission factors.
• Transitioning to renewable energy or improving energy efficiency directly reduces Scope 2 emissions.

2.3 Scope 3: Value Chain Emissions

Scope 3 represents all other indirect emissions that occur in the value chain. It includes upstream and downstream categories such as:

• Purchased goods and services
• Business travel
• Employee commuting
• Waste disposal
• Use of sold products
• End-of-life treatment
• Transportation and distribution

Scope 3 often constitutes over 70-90% of a company’s total emissions, especially for manufacturing, retail, tech, and service industries. Yet, it remains the most inconsistently reported due to:

• Data fragmentation across suppliers
• Complex estimation methodologies
• Limited control over upstream/downstream actors

3. Common Pitfalls in Carbon Disclosures—and the Cost of Getting It Wrong

3.1 Overreliance on Offsets

Offsetting emissions—rather than reducing them—has come under intense scrutiny. In 2025, most regulatory bodies and investors demand transparency on:

• The type, location, and verification of offsets
• Whether offsets are used as a last resort, or as a primary tactic
• Whether reductions are additional, permanent, and verifiable

Carbon neutrality claims based solely on offset purchases are now widely considered misleading without robust Scope 1–3 disclosures and clear decarbonization pathways.

3.2 Partial Scope 3 Reporting

Many companies disclose Scope 1 and 2 emissions while either ignoring or underreporting Scope 3. This creates a skewed carbon profile and raises compliance flags. Inconsistent Scope 3 reporting may result in:

• Non-alignment with CSRD or IFRS S2 frameworks
• Downgrades in ESG ratings
• Rejection from sustainable finance instruments

3.3 Inadequate Methodologies

GHG calculations based on outdated or generalized emission factors, missing activity data, or assumptions not aligned with sector-specific guidelines can render disclosures non-compliant or non-comparable.

The GHG Protocol Technical Guidance must be followed, and methodologies must be disclosed and consistent across reporting periods.

4. Building a Credible Carbon Accounting Framework

4.1 Data Infrastructure and Systems

Accurate carbon accounting begins with robust data governance. This includes:

• Integrating utility, fleet, travel, and procurement data across business units
• Implementing ESG software tools that align with GHG Protocol categories
• Building internal controls and audit trails for emissions data

Large organizations must move away from spreadsheets and adopt automated, enterprise-grade carbon accounting systems.

4.2 Supplier Engagement for Scope 3

Scope 3 transparency hinges on collaboration:

• Engage suppliers to disclose emissions data and upstream footprints.
• Use procurement contracts to mandate ESG data reporting.
• Categorize vendors by emissions impact and incentivize low-carbon sourcing.

Some companies are implementing supplier ESG scorecards and capacity-building programs to enhance upstream disclosure accuracy.

4.3 Alignment With Global Standards

Reporting frameworks are now converging. Businesses must ensure carbon disclosures are aligned with:

• GRI 305 for emissions
• IFRS S2 / ISSB for climate risk and emissions reporting
• CSRD + ESRS E1 for Europe-based operations
• SBTi (Science Based Targets initiative) for emissions targets validation

Disclosure alignment enhances credibility, comparability, and investor access.

4.4 Assurance and Third-Party Verification

Third-party assurance is now required under CSRD and increasingly expected by investors. Companies should prepare for:

• Limited assurance (review-level) in the near term
• Reasonable assurance (audit-level) by 2026–2028

Engaging external verifiers early ensures reporting frameworks, emissions boundaries, and data sources meet assurance criteria.

5. Communicating Emissions Transparently

Carbon footprint data must be translated into meaningful disclosures for diverse stakeholders. This means:

• Investors require performance trends, transition risks, and target alignment.
• Regulators demand scope-by-scope breakdowns and data lineage.
• Employees want to understand their employer’s climate impact.
• Customers increasingly favor low-carbon brands and demand traceable claims.

Key best practices include:

• Publishing methodology notes alongside emissions data
• Visualizing year-on-year reductions by scope
• Tying emissions performance to business outcomes (e.g., lower costs, innovation)

Consistency between sustainability reports, websites, investor communications, and regulatory filings is critical to avoid fragmentation.

The IFRSLAB Perspective

At IFRSLAB, we support businesses in building honest, auditable, and high-integrity carbon disclosure systems.

Our services include:

• Designing GHG inventory frameworks across Scope 1, 2, and 3.
• Implementing ESG data systems aligned with international standards.
• Developing supplier engagement programs for Scope 3 integration.
• Preparing assurance-ready disclosures for CSRD, IFRS, and SBTi alignment.

In the ESG landscape of 2025, credibility is currency. Companies that disclose carbon footprints transparently—not just attractively—will earn trust, capital, and long-term resilience.

We help you build the frameworks to get there.