The role of sustainability and SDGs in patent valuation

Abstract

There is an urgent demand for developing and adopting environmentally sound technologies (ESTs). This article studies the existing methodologies for incorporating sustainability considerations into the complex field of patent valuation, focusing on start-ups and growth companies. Due to the agility and innovative potential, growth companies play a pivotal role in advancing ESTs, and patents serve as crucial instruments in facilitating technology transfer, provided that effective patent valuation processes are in place. The article shows the diversity of guidelines and standards available for patent valuation, highlighting that they provide valuable non-binding frameworks. However, the study reveals that most existing patent valuation standards do not explicitly address sustainability concerns, except for the World Intellectual Capital Initiative (WICI), which is actively engaged in the sustainability discourse. Overall, the challenge is how companies observe sustainability in the valuation process. The United Nations Sustainable Development Goals (SDGs) emerge as a global framework that can guide patent valuation practices. The article highlights the need for patent valuation guidelines to embrace sustainability as an integral component, ensuring that sustainability and ESTs are integrated throughout every phase of the patent life cycle. Acknowledging that start-ups and growing companies often face financial constraints and need guidance in their valuation practices is crucial.

1. Introduction

Entrepreneurs and businesses confront increasing environmental and social challenges. The COVID-19 pandemic has highlighted the possibility of increasing the pace of research, development and large-scale diffusion of innovations to address urgent global challenges. ¹ While the pandemic has primarily focused on social-impact innovations, the urgent need for environmentally sound technologies (ESTs) to address climate change and ecological crises cannot be overstated. ESTs, which are less polluting, more resource-efficient, and socially acceptable, are of paramount importance. ² The increasing importance of sustainable development creates risks and opportunities for companies, necessitating the development of ESTs, products and services and their combinations. ³ Instead of focusing on short-term profits, stakeholders now anticipate companies delivering a triple bottom line of economic, environmental and social value creation. ⁴

Over the last decades, the number and value of patents have increased significantly, and this has been followed by greater attention to transparency and accuracy in the valuation process. ⁵ The need to provide better guidelines on how to value intellectual property (IP) was already on the agenda in 2013 when the European Commission published an expert group report on intellectual property valuation. ⁶ In 2021, the European Financial Reporting Advisory Group (EFRAG) published a discussion document on the information produced by intellectual property rights. The EFRAG consider values related to sustainable development as quantitative or qualitative non-financial information. ⁷ The research question this essay raises is what methods exist to address sustainability in patent valuation.

Although scholars representing different fields of science have written much about patent valuation, there are only scattered mentions and writings about the relationship between patent valuation and sustainable development. ⁸ This essay looks at patent valuation from a start-up and growth companies’ point of view. Start-ups and growth companies are essential for developing new technologies and creating distributive innovation. ⁹ They are agile and can assimilate new technologies and convert them into entrepreneurial endeavours. ¹⁰ Thus, start-ups and growth companies play pivotal roles in developing ESTs. Rapid and seamless technology diffusion is crucial for the advancement of ESTs. Patents can enable technology transfer, but the need for efficient and streamlined patent valuation processes becomes apparent. ¹¹

This article demonstrates various guidelines and standards are available for patent valuation. These are not necessarily binding, and developing a common standard for such a diversified field is complicated. The findings of this article show that most patent valuation standards do not mention sustainability. Overall, the challenge is how sustainability is observed in the valuation process. However, the World Intellectual Capital Initiative (WICI) addresses sustainability reporting related to intangibles. ¹² The United Nations Sustainable Development Goals (SDGs) provide a global framework for patent valuation. ¹³ Start-ups and growth companies require assistance and guidance because of their inherent complexity.

The article is structured as follows: Section 2 analyses sustainability and value. Section 3 explains how patents are valued and Section 4 describes different valuation guidelines addressing sustainability. Section 5 looks at patent valuation and start-ups and growth companies. Section 6 explores how sustainability valuation and SDGs are related. Section 7 concludes.

2. Enhancing patent value through sustainability

Multiple factors influence the value of patents, including the quality of the invention, market demand, the competitive landscape, the capacity to engage in collaborative agreements and the patent holder's effectiveness in enforcing their rights. ¹⁴ Among these factors, sustainability could play a significant role. Sustainability and patents are linked in various ways over the patent's lifespan. In this writing sustainability is approached through holism, which is a fundamental perspective for understanding sustainability.

As a philosophy or mode of thought, holism involves considering a subject as a whole rather than fixating on its components. This holistic approach can also be applied to problem-solving, where a well-balanced consideration of all relevant factors is essential. ¹⁵

Sustainability, a concept often characterized by three core pillars, environmental, economic and social, is designed to cover all dimensions of sustainability. The ‘ripple bottom line’ concept, coined by John Elkington, aims to crystallize the multifaceted nature of sustainability. ¹⁶ While it may be easier to address environmental and equity aspects within the context of sustainability, economic sustainability linked to growth can also be approached similarly. Growth, a pillar of sustainability, must be balanced with the other two pillars: environment and equity. Every civilization has been built on growth ideology throughout history, but the associated costs have become increasingly concerning. Hence, growth must be achieved sustainably, meeting the criteria for sustainable development. ¹⁷ Sustainability should transcend mere equilibrium between economic, social and ecological needs. It demands a developmental approach rooted in environmental sustainability to fulfil the requirements of present and future generations. This approach necessitates a detailed analysis of the ecological effects of the technology. ¹⁸

Companies can choose their business practices if they adhere to legal constraints regarding scope and methods. However, these practices may negatively impact sustainability beyond just the sustainability of economic growth. The damages caused by these impacts can sometimes be shifted to other entities, such as nature, the public sector or people, rather than be borne by the companies responsible for the business practices. This should raise concerns about the current situation. There is no guarantee that companies will prevent social or environmental sustainability damage if such business practices are done within legal boundaries. In addition to legal enforcement, various other measures can contribute to creating sustainable values. These measures include practices such as Corporate Social Responsibility (CSR), Public-Private Partnerships (PPP) and the Circular Economy (CE). ¹⁹

CSR refers to the actions taken by businesses to align with the fundamental values of sustainability. It encompasses a company's responsibility for its societal impacts. In the context of CSR, companies are expected to integrate social, environmental, ethical and human rights considerations into their business operations and core strategy. This should be done in close collaboration with their stakeholders. Companies that follow CSR principles often perform better in traditional valuation and convey positive signals to the market and customers. ²⁰ PPP involves the practice of private funds being invested in public projects. In exchange, the private sector gains the right to create a profit-making model for the project. For instance, this may include the right to receive returns on their initial investment over a specified period. ²¹ The CE is an economic model in which waste is minimized and recycled to serve as resources in the product lifecycle. Its overarching goal is zero waste for society. The CE concept proves to be a valuable measure of sustainability with a direct impact on environmental sustainability due to more environment-friendly processes and reduced waste. Additionally, it contributes to economic growth by enabling resource recycling, which leads to cost savings. The CE brings about systematic changes in how raw materials are sourced and processed for production, as well as in the overall organization and management of businesses. ²²

Assessing the economic value of sustainability is a challenging issue. Impact or responsible investing has dealt with this issue for a considerable duration. The objective of impact investing, or investing for sustainability impact, is to deliberately allocate investment resources to influence companies to achieve sustainability impact objectives. These objectives often focus on mitigating negative, creating positive impacts or combining both. Furthermore, sustainability impact investing underlines the importance of generating outcomes that are quantifiable and measurable. ²³ Responsible investing is commonly understood as an approach to investment that considers the impact of investments on broader society and the natural environment, encompassing both the present and future. ²⁴

Sustainability and its value can be categorized into the de jure value and the de facto value of sustainability. The de jure value refers to normative values of sustainability that are to be recognized. The de facto value of sustainability relates to the values integrated into business practices and product or service pricing, which is already reflected in business value. The process through which the de jure value of sustainability is converted into the de facto value of sustainability is known as monetization. Monetization transforms non-cashed values into cashable ones. One of the primary objectives of sustainability valuation is to bridge the gap between de jure and de facto sustainability values. ²⁵ The framework of sustainability valuation serves as a bridge, linking macro-level sustainability considerations to micro-level firm value. It helps identify sustainability values that a company generates that go further than the value associated with economic growth sustainability. ²⁶

According to the European Union (EU) Directive on sustainability-related disclosures in the financial services sector, sustainable investment is an investment that contributes to an environmental objective. Environmental objectives can be measured using critical resource efficiency indicators, as well as their impact on biodiversity and the CE. It can also encompass investments in economic activities that contribute to social objectives. Key resource efficiency indicators may pertain to factors such as energy usage, renewable energy, raw materials, water and land utilization, waste production and greenhouse gas emissions. ²⁷ Investing for sustainability impact also calls for industry benchmarks and impact performance indicators. ²⁸ The EU's action plan on financing sustainable growth called for creating a common classification system for sustainable economic activities or an EU taxonomy. ²⁹ The EU taxonomy allows financial and non-financial companies to share a common definition of economic activities that can be considered environmentally sustainable. Thus it plays a vital role in helping the EU increase sustainable investment by creating security for investors, protecting private investors from greenwashing, assisting companies to become more climate-friendly, and mitigating market fragmentation. The EU taxonomy targets to direct capital flows towards sustainable investments to achieve sustainable growth. ³⁰

EFRAG's discussion paper studies the information produced by intellectual property rights. Sustainable development is considered as quantitative or qualitative non-financial information. Defining a clear boundary between financial and non-financial sustainability data is becoming increasingly challenging. The information requirements of investors are evolving rapidly in line with the overarching trend of responsible and sustainable investments. Information related to sustainable development encompasses various elements, including descriptive explanations and metrics that offer content regarding the role and significance of specific intangible assets within a broader value community value creation strategy. ³¹

The European Group of Valuers’ Associations (TEGOVA) has published valuation guidelines incorporating sustainable development considerations. These guidelines are directed at TEGOVA's members, who include real estate investment companies, pension companies, banks and investment companies. According to TEGOVA's guidelines, benchmarks are often the most effective means of evaluating sustainable development. Establishing clear standards, certifications and rating criteria is essential. TEGOVA's guidelines also feature a checklist of questions related to sustainable business practices. ³² TEGOVA's guidelines link valuation and sustainability. However, due to the differing contexts, they do not apply to patent valuation.

The growing emphasis on responsible investment has resulted in an escalating demand from primary users of financial statements for information regarding corporate responsibility and sustainability. This includes a need for better insights into how companies engage with the external environment, society at large and the workforce and how these interactions influence the creation and sustainability of their economic value, particularly in the long term. The broader an investor's perspective, the greater the likelihood that sustainability risks and opportunities will translate into financial impacts. Thus there is an increasing need for non-financial information to enable well-informed investment decisions. Additionally, for responsible investors, comprehending a company's strategy, processes and activities related to sustainability factors is an integral component of their financial decision, influencing whether they choose to invest or divest. ³³ The CSRD Directive (Corporate Sustainability Reporting Directive) approved by the EU broadens and clarifies reporting obligations related to responsibility. However, it is essential to note that, at this stage, these obligations are limited to listed small and medium-sized companies. ³⁴ It's worth noting that the directive introduces sustainability responsibilities into a company's financial reporting, although it does not encompass patent valuation.

3. Insights into the patent valuation process

Valuation of a patent is a complex process, as patent value depends on several factors. Nevertheless, specific approaches provide a framework in which to consider the range in which the value of a company is likely to fall. For example, the entry valuation for an investor will depend on both quantitative and qualitative factors. Quantitative factors refer to the tangible aspects such as costs associated with creating or replacing the asset, while qualitative factors are more subjective and include the investor's return expectations, the proportion of the company's ownership management that is willing to relinquish to secure the investment and the investor's perception of the potential for a new concept, product or service. ³⁵ Valuation methodologies differ based on the specific purpose of the valuation. Over 50 intellectual property (IP) valuation methods are in use, highlighting the intricacy of IP valuation. This complexity arises from several factors, including the various forms of IP, each with its unique attributes, various reasons for conducting IP valuation, and the inherent nature of IP within the realm of commerce. ³⁶

The purpose behind a valuation is a crucial factor that shapes the approach and depth of the valuation. ³⁷ For instance, when valuing a patent for tax purposes, there may be legal requirements to adhere to specific standards and provide detailed value conclusions, along with descriptions of the valuation methodology, data and analytical findings. ³⁸ Conversely, when a company conducts an internal valuation for strategic planning, it is often less encumbered with formal requirements. It can concentrate on addressing the specific challenges and issues the company is dealing with. Hence internal valuations typically provide more generalized estimates. ³⁹

Patents are distinct from ordinary property rights associated with physical assets. They are classified as negative rights, granting the holder an exclusive right to prevent others from using the patented invention without granting a right to utilize it. The distinction is not merely a matter of terminology; it holds significant importance, particularly in technological products like medical patents. The commercial use of such inventions often necessitates separate regulatory approval from the state. ⁴⁰ Additionally, there exist other significant differences, such as the concept of non-rivalry. The utilization of knowledge by one person doesn’t preclude another using it, a characteristic not shared by ordinary tangible property. Another prominent difference lies in the possibility of ambiguity of property boundaries. Furthermore, real and personal property typically offer perpetual ownership exclusivity, a feature not shared by patents with a limited protection duration. ⁴¹

When defining the patent for valuation purposes, it is crucial to understand the legal status, the remaining legal life and the economic profile. The legal status, in particular, holds paramount importance. Whether the subject patent is a patent application or an issued patent would have profound implications for appropriate valuation approaches and relevant assumptions. In most cases, technologies and products commercialized in the market are protected by multiple, often interconnected patents rather than one. Furthermore, considering whether the patent is subject to any licences, standards or other encumbrances is also crucial. ⁴² As the timing of the valuation approaches the patent's expiration (typically 20 years after filing), the patent's contribution to value generation diminishes. ⁴³ A thorough analysis of the patent's economic profile, which depends on its competitive and financial relevance, is essential. Competitive relevance pertains to the patent's efficacy as a competitive barrier to entry, a distinguishing factor among rivals or a negotiation asset. Economic relevance is generally linked to the patent's capacity to provide direct profit benefits, royalties or favourable financing terms. ⁴⁴

Valuating patents is complex due to their unique nature. A patentable invention must meet specific criteria, including patentable subject matter, novelty, inventive step and industrial applicability. ⁴⁵ The novelty requirement, which is particularly relevant to valuation, means that the invention is not part of the prior state of the art at the priority date. ⁴⁶ The novelty requirement applies to absolute novelty implying that state of the art encompasses everything made public anywhere in the world through written or oral descriptions, use or other means before the filing date or priority. It is important to note that being available to the public does not require a broad audience; even an oral presentation before a selected audience can abolish novelty without a non-disclosure agreement. ⁴⁷

The distinctiveness of patents is beneficial from a competitive strategy perspective, but it complicates the application of specific valuation approaches. Patent valuation is context-specific, requiring consideration of unique factors and variables. ⁴⁸ The novelty of each patent often makes market comparisons poorly suited. Moreover, the confidential nature of many patent transactions further complicates valuation efforts. Private licensing agreements add complexity, with limited access to reliable licensing information, especially for unlisted companies. As a result, patent valuations often rely on assumptions regarding the patent's future utility, milestones and management decisions. ⁴⁹

4. Patent valuation guidelines with sustainability objectives

The interest in patent valuation has been increasing, particularly in standardizing existing approaches and methods. Laws and legal enforcement make sustainability mandatory and hold companies accountable for their actions, effectively promoting a more sustainable approach. However, legal enforcement has its challenges. One significant challenge lies in the diversity of legal systems across different nations and regions. Coordinating and harmonizing these various legal institutions can be complex and require international cooperation. Furthermore, the successful implementation of sustainability laws relies heavily on the credibility of their intended impact. Measuring the intricate environmental and social impacts is complex, as these effects are multifaceted and only sometimes easy to quantify. Monitoring compliance also presents difficulties. Ensuring that companies adhere to regulations often requires sophisticated tracking and reporting mechanisms and may be hampered by varying levels of enforcement capabilities across different jurisdictions. ⁵⁰

Standards offer a foundational framework for evaluating the monetary value of patents. It is important to note that standards become binding only when explicitly incorporated into legislation or contractual agreements. There are two broad categories of standards: rule-based standards and principle-based standards. Rule-based standards are characterized by specific, concrete rules and guidelines that must be followed. They are often used when strict compliance and enforcement are necessary to ensure consistency and quality. On the other hand, principle-based standards are commonly employed in professional settings. In such contexts, the primary focus is on defining and understanding accepted professional behaviour rather than strict enforcement. Principle-based standards are based on broad principles and values, guiding ethical and professional conduct without specifying detailed rules. The choice between rule-based and principle-based standards depends on the specific context and objectives, with rule-based standards offering clear, enforceable guidelines and principle-based standards emphasizing the underlying principles of professional behaviour. ⁵¹

The European Commission's expert group report on intellectual property valuation highlights several generally accepted ways to measure IP value. However, enhancing transparency in IP valuation processes can significantly improve the efficiency and profitability of IP rights trading. This transparency can foster trust and reduce uncertainties in IP transactions, making it more attractive for businesses and investors. ⁵² Furthermore, Europe's SME strategy for a sustainable and digital Europe (2020) acknowledges the challenges European investors face when considering start-up investments. These challenges often stem from difficulties in assessing the market potential and the intrinsic value of new technologies and early-stage companies. It is a complex task to determine the value of a start-up accurately. As a solution, the Commission proposes using tech due diligence services. These services can help investors thoroughly evaluate the technology, business model and market potential. ⁵³

The European Patent Office (EPO) and certain European National Patent Offices and countries have recognized the importance of guiding companies on how to value intellectual property (IP). To address the growing need for IP valuation, standardization organizations have also issued standards related to IP valuation. These standards and guidelines are crucial in establishing consistent and transparent practices for IP valuation.

The European Patent Office has published a PATSAT that allows sophisticated statistical analyses of bibliographical and legal event patent data. The EPO argues that the preferred method of most companies is the income method. ⁵⁴ The UK Intellectual Property Office (UKIPO) introduces the cost, market and income method. In addition, the UKIPO mentions the royalty method as a sub-method to the income method. ⁵⁵ The Ministry of Industry, Business and Financial Affairs in Denmark has initiated the creation of an IPR toolbox to help small and medium-sized companies (SMEs) clarify the value of companies’ use of IP rights. ⁵⁶

Different standardization bodies set numerous standards. At the international level, there are several widely known standard-setting bodies, such as the International Organization for Standardization (ISO), the Organisation for Economic Cooperation and Development (OECD), the International Accounting Standards Board (IASB) or the International Valuation Standards Council (IVSC). Besides the international bodies, some regional organizations, such as the CEN (Comité Européen de Normalisation), and national ones, like the Deutsches Institut für Normung (DIN), the Association Française de Normalisation (AFNOR), the British Standards Institution (BSI), the Institut der Deutschen Wirtschaftsprüfer (IDW) and the Austrian Standards Institute (ASI) also set standards applicable to IP valuation. ⁵⁷ Standards typically differ in terms of binding force, geographical scope, regulatory depth, the valuation causes covered, qualification of the valuer, type of assets valued and safeguarding quality standards. ⁵⁸

ISO has published management-oriented standards for various industries. ISO 14007:2019 standard will enable organizations to determine and communicate the costs and benefits associated with their environmental aspects, impacts and dependencies on natural resources. In addition, it explains to companies how to conduct cost-benefit analyses for different ecological options. ISO 32210:2022 standard guides the application of sustainability principles for organizations in the financial sector. ⁵⁹

The European Group of Valuers Association's (TEGOVA) inclusion of sustainability considerations in European Valuation Standards reflects the growing recognition of the importance of environmental and sustainability factors in property valuation. TEGOVA's guidelines for property valuation acknowledge the need to incorporate green property standards into the valuation process. This move aligns with the broader global trend towards integrating sustainability into property valuations. Green property standards consider various environmental and sustainability factors, such as energy efficiency, carbon footprint and compliance with green building standards. ⁶⁰

World Intellectual Capital Initiative (WICI) is a global network that focuses on enhancing collaboration between the private and public sectors and improving capital allocation through more effective corporate reporting. WICI's primary goal is to facilitate better corporate reporting by providing information that helps stakeholders make informed decisions. WICI recognizes that more than traditional financial reporting is needed to adequately capture the full spectrum of value that organizations create over varying timeframes. Intangible assets, such as intellectual capital, create value in the modern business landscape. This network places particular emphasis on sustainability reporting related to intangible assets. An important qualifying element of reporting on intangibles and the organization's value creation mechanism is quantitatively expressed information represented as Key Performance Indicators (KPIs).

KPIs are numerical figures (metrics) that organizations use to assess and track their performance, particularly in areas critical to value creation. KPIs provide objective evidence of trends and performance over time. Here are a few examples. First, companies can use citations as a KPI. Citations in external documents, such as academic papers, patents or industry publications, indicate the influence and relevance of a company's intellectual property and innovations. When others refer to a company's intellectual property, it demonstrates its impact and competitiveness in the field. Tracking the number of citations over time can help evaluate the quality and impact of the company's intellectual property portfolio. Second, the remaining patents can be used as a KPI. Patents grant exclusive rights to protect new inventions for a specified period, typically 20 years from the filing date. Monitoring the number of patents that still have substantial remaining time before expiration indicates the company's potential to continue profiting from products and technologies protected by these patents. Thus, KPIs provide insights into the company's innovation pipeline and the longevity of its competitive advantage in the market. ⁶¹

WICI has published a position paper that addresses the valuation of intangibles and SDGs. The intangibles contribute a large share of overall value creation and have a significant role in achieving the SDG goals. Companies can use KPIs to unlock and reveal the value of intangibles as a contribution to the SDGs. Thus, the SDGs should be integrated into the business model. ⁶² In addition, the Value Reporting Foundation (VRF) has three principal sources: the International Integrated Reporting Framework, the Sustainability Accounting Standards Board (SASB) Standards and the International Financial Reporting Standard (IFRS) integrated into Thinking Principles. The overarching goal is to unlock and reveal the value of intangible assets, including sustainability, environmental responsibility and social impact, as a contribution to achieving the SDGs. These principles and standards aim to create a reporting framework that helps organizations, investors and stakeholders better understand how they can align their strategies and activities with the broader objectives of SDGs. In 2022, the IFRS Foundation consolidated the Climate Disclosure Standards Board (CDSB) and the VRF. ⁶³

The complexity of valuing patents, the rising importance of sustainability, and its association with the Sustainable Development Goals, underlines the need for common standards. However, developing such standards is a complex and time-consuming endeavour. This complexity present challenges for start-ups and growth companies, which often need more resources to navigate fragmented information. Hence guidance, industry collaboration and transparency will be critical in ensuring that patent valuation and sustainability reporting contribute to the broader objectives of sustainable development.

5. Valuation clauses for growth companies

The literature presents two primary approaches to patent valuation: quantitative and qualitative. Quantitative methods involve the calculation of the economic value of a patent at a specific point in time. In contrast, qualitative methods derive the value estimate from the characteristics of a patent, often using scoring or rating systems. Regarding quantitative valuation methods, international standards for patent valuation commonly incorporate a combination of three approaches: cost, market and income-based methods. Within these general frameworks, various techniques offer alternative perspectives on value due to their reliance on distinct assumptions or information inputs. Given the unique nature of patents, it is often recommended that companies employ a combination of these approaches.

The stock market provides vital information for valuing publicly listed companies. Conversely, valuing non-listed companies, particularly those in emerging technology sectors with limited benchmarking opportunities, presents more significant challenges. These companies often lack the public financial data and market prices that are readily available for listed companies. A company that is starting up will have no financial record. Overall, gathering financial and non-financial information is challenging. It will have merely projections based on what the company's founders or the management team believes it can achieve. In addition, a company that has not started to market is often loss-making, having used the initial capital provided by the founders. Neither does the company have such a financial record that will give guidance on likely future results.

The cost method is only sometimes used for patent valuation. It values patents based on the development cost of creating a similar asset at a given time, considering both initial development (reproduction costs) and potential replacement costs. However, this method falls short in reflecting the future earning potential of the technology or the market share a company may gain. As a result, it may underestimate the value of a patent, focusing primarily on developmental expenses. Furthermore, the cost-based approach does not explicitly consider a patent's future market value, financial contributions, the impact of legal actions on its value, or potential licensing income. ⁶⁴ The cost method has limited applicability, as it provides minimal economic incentive for inventors, making it challenging to realize a substantial return on innovative efforts. ⁶⁵ However, it can be useful in specific scenarios. Empirical research indicates that around 90% of patents from high-tech companies offered in secondary markets are valued at approximately their acquisition cost. ⁶⁶ This method is suitable for patents not linked to economic activity or commercialization plans, cases where patents can be readily designed around and situations where redevelopment costs play a significant role in negotiations. It is particularly valid for software innovations primarily developed for internal company use. ⁶⁷

The market-based approach determines a patent's value through market transactions, using either direct market value analysis or analogous transaction analysis. It may also consider licensing incomes. This approach is beneficial due to its familiarity and minimal built-in assumptions, making negotiations more straightforward. ⁶⁸ However, it presents challenges for start-ups and growth companies when compared to similar firms, as confidential pricing and patent uniqueness hinder comparisons. Additionally, it struggles to account for differences in patent characteristics, even with transaction data. ⁶⁹ The approach doesn’t consider legal factors, like remaining patent protection, and is influenced by company size, favouring larger companies in defending patent rights, particularly in fields like pharmaceuticals. The approach emphasizes party independence, which can be compromised when there’s a significant size difference, such as a small start-up selling to a large established company. ⁷⁰

The income approach is considered the most suitable method for IP valuation and estimates current asset value based on future revenue forecasts, primarily through royalty income in licensing structures. This forward-looking approach works best with accurate information, especially when the patent closely resembles one already in the market or enters a well-established market. ⁷¹ Sensitivity analysis is used to assess the impact of different input estimates. ⁷² While it effectively covers patent prosecution and maintenance costs, it does not address future litigation expenses or enforceability risks related to licensing agreements. ⁷³ Additionally, it doesn’t capture the value of patents that indirectly influence a company's cash flow, offering market exclusivity and operational freedom. ⁷⁴ For early-stage technology, the income-based approach, while somewhat subjective, is often the most suitable method. However, it necessitates careful analysis. When employing a discounted cash flow model, additional factors come into play. This includes initial costs such as research, engineering and manufacturing development, which can vary based on the company's stage. Post-development, marketing expenses may be required to educate consumers about the technology, with timing varying across industries. Demonstrating a satisfactory return on other intellectual property assets is also essential. ⁷⁵

Qualitative methods assess patent value through rating or scoring patents based on factors considered proxies for patent value. These factors can either positively or negatively influence the patent's value. Various methods are employed, with indicators obtained from bibliometrics, surveys and industry statistics. These indicators result in scores or rankings rather than monetary value. ⁷⁶ In approaches considering patent quality and its environment, indicators encompass factors like legal and patent protection background, technology maturity, market potential, financial aspects and the companies’ management competencies. Other indicators include information about patent document details, such as citation count, geographic coverage and claim strength. Furthermore, the number and properties of IPC (International Patent Classifications) codes can be used to measure the patent's scope. With advancements in computer performance and artificial intelligence, these indicators can be combined more precisely, serving as a proxy for the patent's value, resulting in a descriptive analysis or score. The input data may include patent metrics like forward and backward references, claim count, claim length, claim strength, remaining patent life, market and technology scores, commercial potential and foreign counterpart status. ⁷⁷ Researchers emphasize the correlation between these indicators and patent value, but the complex interdependencies of these indicators continue to pose scientific challenges. ⁷⁸

However, while qualitative approaches deliver relatively swift results compared to other methods, they are often inherently interpretative and subjective. ⁷⁹ In a survey conducted by the European Commission, more than 80% of the industry respondents reported that their companies hardly have any IP valuation practices. Only a minority reported systematic IP valuation within their organizations. The predominant approach to valuation remained qualitative, with quantitative methods typically reserved for mergers and acquisitions. ⁸⁰ Thus, there is a demand to share knowledge of IP valuation practices and their potential for enhancing decision-making processes within companies.

6. Sustainability valuation and its alignment with SDGs

Sustainability valuation encompasses a broader spectrum than traditional valuation methods. Traditional patent valuation, represented by the cost, market and income-based approaches in international patent valuation standards, primarily focuses on business performance and related economic factors. In contrast, sustainability valuation is concerned mainly with identifying values often overlooked in traditional patent valuation. Values determined through sustainability valuation methods may diverge significantly from those derived using conventional approaches, potentially resulting in substantial variations. ⁸¹

An important starting point for considering sustainable development in value creation is the action program for sustainable development (Agenda 2030) approved by the United Nations member states in 2015. The agenda defines 17 sustainable development goals (SDGs). Sustainable development encompasses both environmental considerations and a broader focus on community well-being. Sustainable Development goals emphasize the need for constructing sustainable infrastructure, promoting sustainable industries and fostering innovation. Achieving these objectives involves sustainable industrialization, improved resource efficiency and adopting clean and environmentally friendly technologies and processes. Environmental aspects are divided into various goals, such as reducing excessive packaging, transitioning to cleaner fuels and enhancing recycling practices. On the community's well-being, sustainability entails responsible resource usage, efficient operations and the delivery of long-term social benefits. ⁸² The European Climate Act makes these goals legally binding for EU member states. ⁸³

Standardization bodies and other entities, such as private companies, have developed numerous models and approaches for valuing patents using non-financial metrics and indicators. The indicators used in these methods measure current facts and phenomena likely to reveal something about the company's future financial trends to the information user. ⁸⁴ For example, WICI has developed KPIs that aim to measure and illustrate value-adding factors typical of a specific industry, such as patent rights, primarily related to intangible factors central to sustainable value creation. ⁸⁵

In addition, the SDGs hold a prominent place on the websites of many companies, reflecting the growing recognition of the interconnectedness between sustainable development and intellectual property rights. These companies acknowledge the pivotal role of the SDGs in securing the approval of discerning customers and engaging stakeholders who increasingly prioritize sustainability. Furthermore, the SDGs serve as a crucial benchmark in the competitive landscape. ⁸⁶

There is a general lack of emphasis on valuing intellectual property rights in start-ups and growing companies. The EU has taken steps to address this issue, with the European Union Intellectual Property Office (EUIPO) currently managing the Ideas for Business SME Fund. The SME Fund aims to provide financial support to small and medium-sized enterprises (SMEs) operating in the EU that protect intellectual property rights. It does so by offering vouchers that partially offset the costs of various intellectual property-related activities, including pre-analysis services for intellectual property rights (IP Scan) and the application and registration of intellectual property rights. ⁸⁷ While this is a positive development, it is worth noting that this initiative doesn’t directly address the integration of SDGs into valuation practices. However, it does offer valuable support in the realm of intellectual property rights and valuation for SMEs.

In summary, evaluating a patent or patent portfolio can focus on sustainability-related aspects and associated factors, such as patent filings and grants within sustainability-related patent classifications. Computer performance and artificial intelligence advancements enable a more precise examination of patent claims and codes. This allows the valuer to assign greater importance to specific indicators, particularly those connected to sustainability factors. ⁸⁸ A need for more awareness and expertise often presents significant barriers to incorporating sustainable development practices in start-ups and growth companies.

7. Conclusion

With environmental challenges giving rise to new market opportunities, there's a growing emphasis on using environmental indicators to identify inventions that address present and future ecological concerns. This recognition aligns with understanding sustainability as a multifaceted and interconnected concept.

Sustainability valuation involves assessing the actual sustainability practices (de facto sustainability) within businesses and their potential. The goal is to determine how companies can effectively translate their intended sustainability efforts into genuine efforts. This process involves scrutinizing current practices and exploring innovative approaches to facilitate this transformation. The connection between sustainability and patent valuation has emerged in discussions surrounding financial statements and investor interests. For example, EFRAG's report highlights the relationship between intellectual property rights and sustainable development as one crucial area. ⁸⁹

Legal enforcement makes sustainable practices mandatory and companies accountable for their actions, ensuring the effectiveness of sustainability measures. Nevertheless, it comes with its set of challenges. For instance, there needs to be more global consensus, as various countries and regions do not necessarily adhere to the same legal frameworks. Furthermore, legal enforcement can lead to unintended consequences, such as inadvertently promoting greenwashing, where companies create an illusion of greater sustainability than their actual practices. Additionally, legal enforcement imposes added costs that can burden smaller companies.

In patent valuation, the focus is standardizing existing approaches and methods rather than relying on binding legislation. Standards offer a fundamental framework for considering the value of patents. Following TEGOVA's guidelines, benchmarks are often the most effective means of evaluating sustainability. Therefore, clarifying the standards, certifications and rating criteria is crucial. EFRAG advocates for a comprehensive approach, where the values of sustainable development are integrated seamlessly into a company's overall value framework rather than being treated as a separate part. This approach aligns well with the consideration of patents and their connection to SDGs throughout the various phases of a patent's validity.

In the realm of patent valuation, companies can incorporate SDGs through both qualitative and quantitative methods. In qualitative methods, SDGs can influence the overall value assessment. Indicators are utilized to gauge the environmental impact of the patent. For instance, performance indicators measure and demonstrate factors contributing significantly to the patent's sustainable value creation. In quantitative methods, additional components come into play when using a discounted cash flow model. This model can also be adapted for environmental considerations. For instance, the analysis can be augmented with a specific discussion of future sustainability-related generational concerns. ⁹⁰

Start-ups and growth companies face challenges in selecting appropriate models from a fragmented landscape. They require models that can aid in the valuation process. Moreover, smaller companies would benefit from guidance and advice, which could be facilitated through mechanisms like the currently applied innovation voucher. Investor expectations for responsibility also catalyse start-ups and growth companies, motivating them to consider sustainability factors.

The most effective approach to assess the intersection of sustainability and patents is holistic, where sustainable development plays a pivotal role throughout all stages of a patent's life cycle. This approach has the potential to significantly influence the way innovations are developed, protected and used. Moreover, adopting a holistic perspective on sustainability emphasizes the significance of evaluating the broader ecological and societal implications of patents and innovation activities. Acknowledging the importance of the patent's contribution to the realization of SDGs and utilizing Key Performance Indicators (KPIs) to estimate patent value represents a potential step towards fostering ESTs.