How do we assign an objective value to things that are “priceless”?
The conundrum is not new. One only needs to read Hammurabi’s Code, carved almost four-thousands years ago on a stone monolith, to realise that what gave him sleepless nights and prompted him to set a law in stone for posterity, is still as extant and relevant to our daily lives today, and that we are still puzzled at finding ways to do it now, four millennia later. Even in those simpler days, the Law Giver wrestled with the ethical dilemma of delivering fair and equitable justice at a time when not everyone’s eye and tooth had, nor could they have, the same intrinsic value.
Our clever international arbitration experts that do corporate valuations for a living apply beautifully crafted and elegant algorithms to measure the value of a corporation’s intangible assets. Often, the value of those assets equates to their actual trade price, if there is a ready market out there for them, or to an estimation of their fair market value. When there isn’t a ready market, the assigned value is the result of a complex modelling exercise designed to demonstrate the future earnings or benefit that the said asset will deliver to the corporation. Crystal ball gazing at its best and most precise, in the absence of anything better.
But what happens when the asset in question does not belong to a corporation but to a society, a community, to all of us? How do we value objectively, in monetary terms, one hour of our time, one week’s supply of drinking water, clean air to breathe, the urban park three blocks away from our home where we play catch with our kids, our access to medical services or to opportunities for educational and economic improvement? Surely, all priceless things in our view.
THE CASE FOR VALUING SOMETHING THAT IS PRICELESS
Our team was recently assigned the task of doing just that, in the context of an international arbitration dispute over a large passenger transport infrastructure project. We were commissioned to come up with a monetary value of socio-economic damages caused by delays in the provision of public transport services. Moreover, the value had to hold up and be consensually accepted in an international arbitration tribunal. Like our Babylonian king of old, I had a few sleepless nights!
There is no universal yardstick to do this, no predefined standards, methodologies, or units of measure consensually accepted by all, as there are for valuing a commercial brand, bit of intellectual property, or customer good will.
Our approach to identifying which indicators to evaluate, what units of measure to use, and how to justify their application in the context of our case to the exacting requirements of a courtroom was, first and foremost, pragmatic:
- To qualify as appropriate for use in a legal challenge, socio-economic indicators of damages had to derive directly and unambiguously from the core element of the dispute; in our case, the absence of transport services to the citizen caused by delays in the completion of the transport infrastructure project.
- A single metric had to be found as a baseline, capable of linking all indicators of damages in one single deductive line of reasoning, upon which the calculation of damages for the different indicators would be made.
- A market-independent pricing mechanism was required to value socio-economic damages in monetary terms. Furthermore, the computational method employed to calculate the dollar value of damages had to be acceptable to all stakeholders: corporates, government institutions, financing agencies, and arbitration tribunals. Also, the conversion ratios and indexes employed had to be well established and documented elsewhere. In short, the validity of the methodology employed to calculate monetary values had to be unimpeachable and accepted implicitly by all parties in the dispute.
Since the only undisputed fact of our case was that delays had occurred in the provision of transport services, the baseline metric had therefore to be expressed as a unit of time, as: (a) hours lost per journey/passenger, (b) revenue lost by individuals per year because of lack of access to economic opportunities, and (c) mtCO2e per day/year emitted (i.e. not saved) because of lack of environmentally sustainable transport services.
The team developed an algorithm to calculate an “Equivalent Service Day” (ESD) index per year, to be used as a baseline. The algorithm incorporated the modelled estimates of traffic, as well as the differential between supply and demand for services, and measured the unsatisfied demand for transport services experienced by users because of the delays in project completion.
The team also assessed several pricing models (as used in power generation and transport logistics industries, as well as internationally accepted IISD and IVSC guidelines), ultimately choosing instead to use Social Pricing as employed to evaluate government-sponsored infrastructure projects inter alia.
SUSTAINABILITY CONSIDERATIONS IN INTERNATIONAL ARBITRATION DISPUTES
Within the European Union an estimated 50,000 corporates will be legally required by the end of 2024 to issue yearly sustainability (ESG) reports, alongside their financial reporting. Reports will include the formulation of a corporate sustainability strategy, policies, and plans with specific targets, KPIs, and independently verifiable compliance measures.
In the US, the SEC is taking the lead in requiring publicly traded companies to report on climate-related risks that pose a threat to corporate operations and financial condition. These requirements are designed mostly to protect investors and will be phased in between 2024 and 2028.
Many other countries, most notably UK, Canada and Australia, are consolidating an already robust environmental and socio-economic regulatory landscape at national and provincial level, within a sustainability legislative framework aligned with national environmental and economic policy-driven targets, e.g.: circular economy goals, net-zero transition policy commitments, sovereign green bond issuing.
It is argued that the domain of (international) arbitration could be a natural space to resolve sustainability/ESG disputes. This for several reasons, not the least that the parties in dispute can nominate arbitrators that are technical specialists and subject matter experts in ESG issues. In disputes of the type “Investor vs. State”, arbitration also offers a flexible procedural framework and (intended) shorter timeframes in which awards and injunctions may be secured, levelling out the likely disproportionate resource availability differences between the parties.
IT’S A BRAVE NEW WORLD
So, first-generation sustainability/ESG legislation is coming into effect at national and supranational levels. One of the main drives behind the legislation is to ensure corporates divulge their sustainability/ESG objectives and policies, explain how (in terms of policies, plans, actionable mitigation and improvement measures) they will address inherent risks, and measure progress towards the goals they set themselves. The implications however go beyond reporting compliance. The availability of this information in the public domain will have a bearing on corporate operational and investment risk assessment, and ultimately corporate value and valuation practices.
In this context, it should be expected that disputes wholly or partly related to misrepresentation and/or non-compliance with sustainability and ESG reported goals will soon become mainstream in arbitration courts’ dockets and international law.
It will take some time until the legislation matures and decants into effective dispute resolution praxis and adequately structured contracts: commercial contracts and international trade and investment treaties. However, to make these instruments truly effective in resolving sustainability/ESG disputes much is still wanting; the jurisprudence, the enforcement mechanisms, and the sophisticated computational tools (our very own remit as subject matter experts and expert witnesses) to assign unambiguously, fairly and equitably, a value to those things that are priceless to us all.