Towards a Consensus in the Country Equity Risk Premium Debate in International Arbitration?

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Introduction:

Country Equity Risk Premium (CERP) represents the additional return equity investors require to compensate for the heightened risks of investing in a particular country. These risks may arise from political instability, economic volatility, currency fluctuations, expropriation threats, and weaknesses in the legal and regulatory framework. Each of these risk components can, in principle, be separately estimated, and their individual effects on the quantum of damages or the valuation of the investment can likewise be systematically assessed (Bekaert et al., 2016).

The treatment of the CERP in investment valuation, particularly in the context of international arbitration, has long been a source of conceptual ambiguity and practical disagreement. Despite its critical impact on damages calculations or valuations, there remains no uniform approach to estimating, interpreting, or applying CERP—whether in whole or in part. This article argues that an emerging consensus is beginning to form around a more refined treatment of the CERP, one that rejects simplistic all-or-nothing methodologies in favor of approaches that distinguish between treaty-protected and non-protected elements of country risk. To make this case, the current article first clarifies the conceptual and economic foundations of CERP and its role in investment valuation. It then reviews the implications of the Chorzów standard in relation to lawful and unlawful expropriations. Building on that, the article evaluates the role of treaty protection in isolating risks that should or should not be reflected in the discount rate. Finally, it addresses the methodological tensions underlying current valuation practices, and proposes a principled path forward.