Certification, Labels and Ratings

How third parties such as inspectors, standards bodies and rating agencies provide information buyers cannot easily get themselves, and when they fail.

Buyers often cannot check quality themselves. Is this electrical appliance safe? Is this food organic? Is this bond safe to invest in? Markets have developed a solution: independent organisations that check quality and publish the results. This is called third-party verification or certification.

Many forms

Certification appears in many forms:

Standards marks: In India, the Bureau of Indian Standards’ ISI mark certifies that many industrial and consumer products meet national standards. Similar marks exist in other countries.
Food and product labels: organic, fair trade and energy efficiency labels.
Professional licences: certify that doctors, lawyers and electricians have met training requirements.
Ratings and reviews: restaurant guides, hotel star ratings and online review platforms.
Credit ratings: agencies such as S&P, Moody’s and Fitch rate the risk of bonds.

Each helps buyers make decisions without investigating everything themselves, and helps high-quality sellers prove their quality.

When certifiers fail

Certification works only if the certifier is trustworthy. A major risk is a conflict of interest. The best-known example comes from the 2008 financial crisis. Credit rating agencies were paid by the banks whose mortgage-backed securities they rated. Many of these securities received the highest AAA ratings, then suffered heavy losses. Investigations, including by the U.S. Financial Crisis Inquiry Commission, found that the agencies’ ratings had been badly flawed, and that the pressure to win business played a role.

The energy label on a fridge

In many countries, fridges carry an energy label with a rating or an estimated yearly electricity use. A shopper cannot measure a fridge's energy use in the store. The label, based on standard testing, lets them compare models quickly and choose one that saves money over its life. It also rewards manufacturers who invest in efficiency.

Too many labels

When labels multiply, they can confuse rather than inform. Some labels have weak standards, and some companies create their own labels that look official. Economists and consumer groups encourage people to check who stands behind a label and what it actually requires.

Treating every label as equally reliable

A label is only as good as the organisation behind it and the standard it certifies. Some are backed by strict, independent testing; others are little more than marketing. Checking who issues a label and who pays for it helps judge how much to trust it.

Key takeaways

Certification lets independent third parties verify quality that buyers cannot check themselves.
Standards marks, labels, licences, reviews and credit ratings are all forms of certification.
Conflicts of interest can undermine certifiers, as with credit ratings before 2008.
Too many labels, or labels with weak standards, can confuse buyers.