Competition Concerns in Environmental Audit Markets

1. Introduction

Environmental audit markets comprise services through which independent auditors, consultants, laboratories, certification bodies, and accredited conformity-assessment organisations evaluate an enterprise's compliance with environmental laws, permits, emissions standards, waste-management requirements, environmental-management systems, sustainability commitments, and other environmental obligations.

Competition issues arise because environmental auditing has an unusual combination of commercial activity, technical expertise, regulatory recognition, accreditation, and public-interest objectives. A regulator may require an audit, while the audited undertaking may choose the auditor. In other situations, only auditors possessing a particular accreditation or certification may be eligible.

This creates potential competition concerns involving:

• concentration among environmental audit firms;
• accreditation barriers;
• exclusive recognition of particular auditors;
• discriminatory access to regulatory schemes;
• conflicts of interest;
• bundling of auditing with consultancy;
• tying certification to other services;
• refusal to recognise equivalent certifications;
• exclusionary professional or industry standards;
• bid rigging and allocation of audit contracts;
• information exchange among competing auditors;
• excessive certification or audit fees;
• discriminatory treatment of smaller audit firms;
• mergers between major environmental certification bodies; and
• regulatory rules that unnecessarily restrict entry.

A particularly important legal distinction is between competition among environmental auditors and competition concerning the accreditation or standard-setting system governing those auditors. EU jurisprudence, for example, recognises that accreditation can legitimately involve public-authority functions and may therefore be organised differently from ordinary commercial markets.

2. Relevant Market

The relevant market may need to be defined carefully because "environmental auditing" is not necessarily one single market.

Possible product markets include:

1. Environmental compliance audits.
2. Environmental-management-system audits.
3. ISO 14001 certification audits.
4. Emissions-verification services.
5. Carbon/greenhouse-gas verification.
6. Waste-management compliance audits.
7. Water and wastewater compliance audits.
8. Environmental impact compliance assessments.
9. Environmental due-diligence audits.
10. Sustainability/ESG assurance.
11. Environmental laboratory testing combined with audit services.
12. Accredited conformity-assessment services.

The geographic market may be:

• local;
• regional;
• national;
• EU-wide; or
• international,

depending upon recognition of auditor qualifications, accreditation requirements, travel requirements, language, regulatory approval and mutual-recognition arrangements.

3. Major Competition Concerns

A. High Market Concentration

Environmental auditing may exhibit significant economies of scale.

Large audit and certification groups can spread:

• accreditation costs;
• technical personnel costs;
• training costs;
• software expenses;
• insurance costs;
• regulatory-monitoring costs; and
• international recognition costs

over a large client base.

If a small number of firms acquire substantial market shares, competition authorities may examine whether consolidation results in:

• higher audit fees;
• reduced choice;
• lower service quality;
• longer audit timelines;
• reduced innovation; or
• exclusion of smaller auditing firms.

Merger control therefore becomes important where two significant certification or environmental-audit providers combine.

4. Accreditation as a Barrier to Entry

Accreditation is one of the most important structural issues.

An environmental auditor may need accreditation before its reports are accepted by regulators, financial institutions, customers or environmental certification schemes.

Accreditation requirements can promote reliability and independence. However, unnecessarily restrictive accreditation rules can also make market entry difficult.

Potential problems include:

• excessive application fees;
• lengthy approval procedures;
• unnecessarily restrictive experience requirements;
• discriminatory accreditation criteria;
• refusal to recognise equivalent foreign qualifications;
• mandatory affiliation with particular professional bodies;
• restrictions on cross-border accreditation; and
• incumbent influence over accreditation requirements.

The European Court of Justice considered this issue directly in Analisi G. Caracciolo Srl v Regione Siciliana, Case C-142/20. The Court examined the EU system under Regulation 765/2008, under which each Member State has a single national accreditation body. It held that accreditation under that system constitutes an exercise of public authority and that the national accreditation body is not an "undertaking" for EU competition-law purposes when performing that public-authority function.

The case is particularly relevant because the EU framework itself recognises a principle of non-competition among national accreditation bodies.

Competition lesson

A monopoly created by regulation is not automatically an antitrust violation. The critical question is whether the restriction is an inherent part of a legitimate regulatory system or whether a commercial actor is using regulatory power to exclude competing firms.

5. Regulatory Recognition and Exclusion

Suppose an environmental regulator accepts reports only from auditors belonging to one organisation.

This may create a substantial entry barrier.

Competition authorities may examine:

• who controls admission;
• whether admission criteria are objective;
• whether equivalent qualifications are accepted;
• whether applicants have procedural rights;
• whether the regulator or professional body has commercial interests; and
• whether incumbent auditors participate in deciding who can enter the market.

The risk becomes greater where an organisation simultaneously:

1. establishes technical standards;
2. accredits auditors;
3. performs audits itself; and
4. influences regulatory recognition.

This can create a vertical conflict of interest.

6. Self-Preferencing by Certification or Accreditation Bodies

A certification organisation may operate both as:

• a certifier, and
• a commercial provider of environmental consultancy or related services.

This structure can create incentives to favour its own affiliated audit or consulting services.

Potential conduct includes:

• giving affiliated auditors faster accreditation;
• giving affiliated consultants preferential access to certification;
• withholding information from independent auditors;
• using certification data to target competitors' customers;
• conditioning certification on purchase of consultancy services; or
• applying technical requirements more strictly to competing firms.

The basic competition concern resembles the conflict-of-interest problem considered in MOTOE.

In MOTOE, Case C-49/07, the Court considered an organisation that simultaneously participated in an economic activity and possessed a regulatory power concerning competitors. The Court found that such an arrangement could distort competition where the organisation had authority to influence market access while itself operating in the market.

Application to environmental audits

An environmental-certification body that both competes with independent auditors and controls their access to certification may require structural safeguards, independent decision-making and transparent criteria.

7. Exclusive Certification Arrangements

Exclusive agreements may arise where:

• a regulator recognises only one certification provider;
• a corporation requires suppliers to use a designated auditor;
• an industry association designates one environmental-certification organisation;
• a procurement scheme recognises only one auditing standard; or
• a certification body enters exclusive arrangements with laboratories.

Exclusivity is not necessarily unlawful.

The analysis depends upon:

• duration;
• market coverage;
• market power;
• availability of alternatives;
• barriers to switching;
• regulatory necessity; and
• effects on competing auditors.

Long-term exclusivity covering a substantial portion of demand can foreclose rival environmental auditors.

8. Standard-Setting and Environmental Certification

Environmental audits frequently depend on standards.

Examples include:

• environmental-management standards;
• emissions measurement methodologies;
• sustainability standards;
• waste classification standards;
• environmental testing protocols; and
• certification criteria.

Standards can generate significant efficiencies by creating trust and comparability.

However, competitors may use standard-setting bodies to exclude alternative technologies or audit methodologies.

The leading US authority is Allied Tube & Conduit Corp. v Indian Head, Inc., 486 U.S. 492 (1988).

The Supreme Court held that manipulation of a private standard-setting process by economically interested participants could attract antitrust scrutiny. The Court stressed that private standards can have substantial effects on markets, particularly where exclusion from the standard effectively prevents a product from competing.

Environmental application

If incumbent environmental auditors manipulate an industry standard so that only their methodology, software or certification model qualifies, the conduct may raise analogous competition concerns.

9. Conflicts of Interest Between Auditing and Consultancy

One of the most important issues is the audit-consultancy separation problem.

An environmental auditor may identify deficiencies and then offer the client consultancy services to correct those deficiencies.

This can create incentives to:

• identify unnecessary deficiencies;
• recommend proprietary systems;
• favour affiliated consultants;
• condition certification on consultancy purchases; or
• reduce audit independence.

Competition law may become relevant where the arrangement excludes rival consultants or auditors.

There may also be sector-specific professional or regulatory rules addressing auditor independence.

10. Bundling and Tying

An environmental certification provider with market power might require customers purchasing:

environmental certification + environmental consultancy + laboratory testing + compliance software

as one package.

Bundling can have legitimate efficiency benefits.

But competition concerns may arise where a dominant provider makes certification conditional upon purchasing another service.

Relevant questions include:

• Is the provider dominant?
• Are the services technically or commercially separate?
• Is certification genuinely conditional on the additional purchase?
• Can customers purchase the additional service independently?
• Are rival suppliers excluded?
• Does the arrangement substantially foreclose competition?

11. Information Exchange Among Environmental Auditors

Environmental auditors possess commercially sensitive information.

They may learn about:

• clients' production volumes;
• emissions;
• environmental investment;
• compliance costs;
• production technology;
• expansion plans;
• environmental liabilities; and
• future regulatory strategies.

If competing auditors exchange commercially sensitive information outside legitimate audit requirements, this may facilitate coordination.

Particular risks arise when auditors collectively exchange:

• prices;
• discounts;
• customer allocation information;
• tender information;
• future pricing;
• capacity information; or
• strategic business plans.

The fact that information was obtained in a professional capacity does not automatically make commercial exchange lawful.

12. Bid Rigging in Environmental Audit Procurement

Public authorities and large corporations frequently procure environmental audits through competitive tenders.

Potential cartel conduct includes:

Bid rotation

Auditors take turns winning government contracts.

Customer allocation

Competing firms divide:

• regions;
• industrial sectors;
• government departments; or
• corporate clients.

Cover bidding

Competitors submit deliberately unattractive bids so that a designated firm wins.

Price coordination

Competitors agree minimum audit fees.

Market allocation

Firms agree not to enter each other's geographic markets.

These are conventional cartel risks and can be particularly serious because environmental audits are often procured by public bodies.

13. Standard-Setting Case Law

1. Allied Tube & Conduit Corp. v Indian Head, Inc., 486 U.S. 492 (1988)

The Supreme Court examined manipulation of a private standard-setting process by commercially interested participants.

The case established that private standard-setting can have anticompetitive consequences when economically interested firms manipulate the process to exclude rivals.

Environmental-audit relevance: environmental certification standards must have transparent and technically defensible procedures.

2. American Society of Mechanical Engineers v Hydrolevel Corp., 456 U.S. 556 (1982)

ASME was held potentially liable under antitrust law for the conduct of its agents acting with apparent authority in circumstances involving a professional standards organisation.

Environmental-audit relevance: professional and technical organisations cannot necessarily escape competition liability merely because they are nonprofit or standards-oriented.

3. Radiant Burners, Inc. v Peoples Gas Light & Coke Co., 364 U.S. 656 (1961)

The case involved alleged exclusionary conduct associated with a private product approval and standards system.

It is an important early authority demonstrating that private certification and approval mechanisms may have antitrust significance. The Supreme Court's later discussion in Allied Tube specifically identified Radiant Burners as part of the standard-setting antitrust line of authority.

Environmental-audit relevance: private approval mechanisms should not be manipulated to prevent competitors from obtaining market access.

4. ECOS Electronics Corp. v Underwriters Laboratories, 743 F.2d 498 (7th Cir. 1984)

ECOS challenged aspects of Underwriters Laboratories' product-standard and approval activities under antitrust law. The Seventh Circuit treated the claim cautiously and recognised that certification organisations can perform legitimate standard-setting functions.

Environmental-audit relevance: merely giving one product or methodology certification does not automatically establish an antitrust violation; exclusionary conduct and competitive effects remain important.

14. Professional Regulation and Audit Markets

5. Wouters v Algemene Raad van de Nederlandse Orde van Advocaten, Case C-309/99

The Court of Justice held that a professional body could constitute an association of undertakings for competition-law purposes, while recognising that certain professional restrictions could be justified by legitimate objectives connected with the proper practice of the profession.

Environmental-audit relevance: professional independence and auditor integrity can justify certain restrictions, but professional rules remain capable of competition-law scrutiny.

Thus, a rule requiring environmental auditors to maintain independence may be legitimate, whereas a rule designed primarily to exclude competing auditors would raise different concerns.

15. Public Authority and Market Power

6. MOTOE v Elliniko Dimosio, Case C-49/07

MOTOE concerned an organisation that both engaged in economic activities and possessed an important authorisation-related power.

The Court was concerned with the possibility that such regulatory authority could be used to distort competition in favour of the organisation's own economic activities.

Environmental-audit relevance: a body responsible for environmental accreditation or approval should have safeguards where it also has commercial interests in providing audit services.

16. Accreditation and Competition

7. Analisi G. Caracciolo Srl v Regione Siciliana, Case C-142/20

This case is particularly relevant to environmental auditing because the EU accreditation framework expressly serves public interests including environmental protection.

The Court recognised that national accreditation bodies under Regulation 765/2008 perform a public-authority function and are subject to a non-competition model.

The judgment therefore illustrates an important limitation:

Not every restriction on competition in an accreditation system is itself an antitrust problem.

Where the restriction is an integral part of a legally established public-authority accreditation system, ordinary competition-law concepts may operate differently.

17. Indian Environmental Audit Context

India provides an especially interesting environmental-audit example.

In Gujarat Pollution Control Board v. Gujarat, the proceedings concerning the environmental-audit scheme contemplated recognition of environmental auditors and directed the preparation of a list of recognised environmental auditors.

The case demonstrates how environmental auditing can operate through a regulatory recognition system, rather than simply as an ordinary consulting market.

This creates competition-law questions concerning:

• who may become a recognised environmental auditor;
• objective eligibility criteria;
• transparency of recognition;
• equal treatment of applicants;
• renewal and suspension of recognition;
• independence from industrial clients;
• fees and charges;
• conflicts of interest; and
• whether recognition rules unnecessarily exclude qualified competitors.

The competition analysis must therefore distinguish between legitimate environmental regulation and unnecessary restrictions on market entry.

18. Vertical Restraints

Environmental certification providers may impose contractual restrictions on:

• laboratories;
• consultants;
• subcontract auditors;
• inspection agencies;
• software providers;
• testing facilities; and
• environmental-monitoring companies.

Potential restraints include:

Exclusive dealing

A certification organisation requires laboratories to work exclusively with it.

Non-compete provisions

Auditors are prevented from working for competing certification organisations.

Territorial restrictions

Auditors are prevented from serving clients in particular territories.

Customer restrictions

Auditors are prohibited from serving specified categories of clients.

Resale or fee restrictions

Certification organisations attempt to control the prices charged by independent auditors.

Competition law may scrutinise these arrangements depending on market power, duration, coverage and competitive effects.

19. Merger Control

Environmental audit markets can become concentrated through acquisitions.

A merger between major certification bodies may raise:

Horizontal concerns

Two competing environmental auditors combine.

Vertical concerns

An accreditation or standards organisation acquires an auditing company.

Portfolio concerns

A certification company combines environmental auditing with:

• laboratories;
• environmental software;
• ESG reporting;
• sustainability consulting;
• emissions trading services; or
• environmental data platforms.

Conglomerate concerns

A large certification group can use its established customer relationships in one certification market to expand into adjacent markets.

Authorities may therefore examine:

• market shares;
• closeness of competition;
• entry barriers;
• customer switching;
• accreditation requirements;
• procurement data; and
• efficiencies.

20. The Role of Quality Competition

Environmental auditing is not simply a price market.

Competition can occur through:

• auditor competence;
• turnaround time;
• geographic coverage;
• technical specialisation;
• digital audit tools;
• data analytics;
• verification accuracy;
• reporting quality;
• independence;
• international recognition; and
• ability to handle complex industrial facilities.

Competition law should therefore consider quality effects, not merely audit fees.

A seemingly inexpensive audit that lacks credibility can impose substantial costs on regulators, investors and the environment.

21. Greenwashing and Competition

Environmental certification markets also intersect with greenwashing.

A certification provider may gain market power if its label becomes particularly valuable to consumers or investors.

Potential concerns include:

• misleading environmental certification;
• inconsistent certification criteria;
• preferential certification of affiliated businesses;
• discriminatory access to certification;
• false claims concerning verification;
• manipulation of environmental scores; and
• agreements restricting competing environmental labels.

These issues can simultaneously involve:

• competition law;
• consumer-protection law;
• environmental regulation; and
• corporate disclosure requirements.

22. Regulatory Capture

A particularly significant structural concern is regulatory capture.

Environmental auditors may become influential in designing:

• audit methodologies;
• certification standards;
• accreditation rules;
• reporting templates; and
• eligibility requirements.

If major incumbents participate disproportionately in these processes, standards may evolve in ways that increase competitors' costs.

The Allied Tube principle is particularly relevant here: private standard-setting procedures must contain safeguards against commercially motivated manipulation.

23. Competition Compliance Framework

Environmental audit organisations should adopt the following safeguards:

24. Key Case-Law Principles

25. Conclusion

Environmental audit markets require a careful balance between competition and regulatory credibility.

Competition promotes:

• lower prices;
• innovation;
• better auditing technology;
• wider auditor choice;
• faster services; and
• improved quality.

At the same time, environmental auditing cannot be treated as an entirely ordinary consulting market because audit credibility may depend upon independence, accreditation, technical competence and regulatory recognition.

The principal competition-law risks therefore arise where:

1. accreditation systems unnecessarily exclude competitors;
2. incumbent auditors manipulate environmental standards;
3. certification bodies favour affiliated businesses;
4. audit and consultancy services are improperly bundled;
5. competitors coordinate prices or tenders;
6. exclusive arrangements foreclose rival auditors;
7. mergers substantially reduce auditor choice; or
8. a body simultaneously possesses regulatory authority and competes commercially.