ANALYSIS

iStock-1214759696 For love of the game: (Re)Thinking Sustainability

Aadil Omar HEAD OF EQUITY RESEARCH

i KEY TAKE-AWAYS

People naturally opt for sustainable choices when If people approach sustainability with the aim that choice is iterated over time: their intuitive of winning, there is an incentive to cheat. decisions are based on rewards in relation to This can lead to serious harm, as in the VW how sustainable an activity is. Short-termism “Dieselgate” scandal. Short-termism and self- usually has sub-optimal results. interest trumped sustainability. The spirit of sustainability is akin to an infinite The flood of money into “sustainable” game, where there are no winners or losers, investments now gives people an incentive to only ongoing interaction that benefits all sides. cheat by “greenwashing” or hyping their funds, This is opposed to a finite game which has exacerbated by the complexity of measuring rules, and participants have a short-term win/ sustainability. Investors need to be aware of

Prudential Investment Managers © lose mindset. this risk.

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ear the word “sustainability” maintain at a certain rate over time. Hand you are likely to imagine the As far as the practicalities of life are whirring blades of a windmill out at concerned, people easily grasp the sea or the glint of photovoltaic solar concept of sustainability. We make panels as they shimmer in the mid- intuitive decisions based on rewards day sun. Keep your eyes closed a little in relation to how sustainable an longer and you dream of futuristic activity is. cities adorned with water-efficient vertical gardens, teeming with electric Take career choice as an example: vehicles like bees through a hive. most people would appreciate that Sustainability, as a concept, has become while it can be financially (or socially) synonymous with visions of the future lucrative to pursue a career as a drug and is a natural bedfellow of acronyms lord, the longevity of such a career such as ESG (Environmental, Social would fall short of a less lucrative and Governance) and UNFCCC (United choice – a plumber, for instance. A Nations Framework Convention on self-interested economic agent (also Climate Change). To be clear, these known as an econ) would weigh the are positive associations, and I support benefits accrued in a particular choice the agenda and goals articulated against the length of time one is able by the agencies championing these to carry out the activity. With a few causes. But this is not an article about notable exceptions, sustainability frameworks or fund characteristics should be negatively correlated to – rather, I am hoping to dive a little short-term gratification, as illustrated deeper into the spirit of sustainability. in Graph 1. More generally, we can Sustainability is intuitive when understand that the less threatening we’re not thinking about it a job is, be it exposure to harm or The characteristic of sustainability can requiring specific attributes, the more be broadly defined as the ability to sustainable it should be. Prudential Investment Managers ©

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GraphGraph 1: The 1: The higher higher a a career’scareer’s short-term short-term reward, reward, the lower its sustainability the lower its sustainability Near-term rewards Narco (Drug Lord)

Pro Golfer Heavyweight boxer Saturation Diver

Astronaut Emergency doctor Accountant

Petty criminal Grocer

Admin clerk

Sustainability of career

SOURCE: PrudentialSource: Prudential Investment Investment Managers Managers

For readers interested in trivia in decompressing the human body The question of career sustainability when surfacing from the depths of really hit home recently when I learned the blue. It involves divers living in a of a fascinating way of earning a living pressurized environment (chambers) for – a task known as . up to 28 days while on tour of duty. Saturation diving is one of the most The risks of such a job are obvious to demanding, dangerous, and well-paid someone with even partial familiarity commercial jobs that exists today. of deep-water diving. But for readers A diver pressurised gas interested in understanding why such accumulates dissolved nitrogen in their a job probably won’t make the list body tissues. If allowed to come out of of sustainable careers, have a look too quickly, they could suffer into the Byford Dolphin Accident1 , a sickness. Saturation gruesome but fascinating incident if diving is a technique developed to ever there was one. overcome the loss of time involved Prudential Investment Managers ©

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Infinite games opponent. Infinite games are not James Carse introduced the trying to outrun the march of time, differentiation between finite but rather to exist beyond the scope and infinite games with his widely of time-bound objectives. influential title “Finite and Infinite Games”, first published in 1986. An example of the two in the same domain would be the finite game of “There are at least two kinds of games. a debate versus the infinite game of One could be called finite, the other a conversation. In a debate each side infinite. A finite game is played for tries to undo the argument structure of the purpose of winning, an infinite the other with the objective of being game for the purpose of continuing announced the winner (either explicitly the play”2. in contest or through public opinion). A friendly conversation, on the other Finite games are played for the hand, is an infinite game engaged in purpose of winning. They are played by by participants who have no agenda participants who obey rules, recognise beyond the utility of conversation. boundaries, get judged and announce There is no judges panel to award winners. Finite games can be hacked, points for credible arguments, nor is the rules bent (or broken) and they there a social benefit for the party who can be tactfully gamed. They are speaks more (or less). The objective is theatrical, necessitate an audience self-contained. In the words of novelist and require judgement. Michael Shaara, it is done “for love of the game”. An infinite game exists for the purpose of continuing play. There is no rule Liar, liar book – the strategies employed in By now we can probably see the golden infinite games are geared to keeping thread of sustainability as the essence the game alive, not beating an of an infinite game. When we approach

1The Byford Dolphin accident, serving as a stark reminder of the dangers of saturation diving, involved the loss of four divers’ lives and resulted in the formation of the Divers Alliance, created by the relatives of the victims. 2Carse, James. Finite and Infinite Games (p. 3). Free Press. Kindle Edition. Prudential Investment Managers ©

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an activity without an agenda, we Greater consequences, however, arise abandon the win/lose mindset, and the when people try to defeat the common activity stands unburdened. I’ve always and professional decencies required been intrigued by the vocabulary used for a well-functioning society. Two of to describe the labour of vocational the more recent high-profile situations activities such as those of a medical come to mind: doctor – we say a doctor practises his • The Volkswagen emissions scandal: craft, as opposed to completing a job. Also known as Dieselgate, the The subtlety is suggestive of an infinite incident involved deliberate actions game – perhaps because tending to on the part of the VW group to the ill will never be complete. misdirect regulatory authorities as to the noxious emissions of diesel- The sting in the tail for this analogy powered vehicles. VW intentionally of finite versus infinite games lies in programmed diesel to the strategy employed by participants. activate their emissions controls More particularly, when people during laboratory testing using approach what should be an infinite what is known as a defeat device. game with a finite game mindset, the The diesel-powered vehicles emitted consequences can range from mildly up to 40 times more nitrous oxide annoying to existentially risky. I am sure in real-world driving as compared you’ve had the unfortunate experience to lab tests. of attempting a casual conversation • The Wells Fargo account fraud scandal: This was a controversy with some nit-picker, only to have brought about by the creation of them silently keep score by correcting millions of fraudulent banking your grammar, pointing out your accounts on behalf of Wells Fargo unsubstantiated generalisations and clients without their consent (or accusing you of poorly constructing knowledge). Under from arguments. The next conversation will supervisors, Wells Fargo employees surely be confined to talking about would open accounts without the weather if you’re unable to avoid customer consent in an effort to them. meet sales targets. Prudential Investment Managers ©

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These accounts and countless others We respond to incentives (many of which we will never hear “Show me the incentive and I’ll show about) illustrate the harm caused you the outcome” - Charlie Munger when short-termism and self-interest trump real sustainability. We often Graph 2 below clearly illustrates the resort to moral judgements and flood of global capital that has been character restorations as a way out drawn into funds that invest with of the quagmire, but these have a mandate of sustainability. These limited effect. Understanding what significant flows into ESG and related game is being played, and why there products have been a strong motivator might be an opportunity for people to for market participants to get the cheat, may be a better starting point accolades necessary to participate in in reconciling the dilemma. the windfall.

Graph 2: Sustainable fund flows surge past US$150 billion Graph 2: Sustainable fund flows surge past US$150 billion Flows into sustainable funds over time, US$ billions 150B

100B

50B

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q2 Q4 2018 2019 2020

Europe U.S. Rest of World

Source: Morningstar SOURCE: Morningstar Prudential Investment Managers ©

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The desired outcomes and ultimate acre, 24-hour armed enclosure in goals intended by the agents and Kenya. The mother and daughter agencies championing the sustainable pair represent the only hope for agenda is not in question. Rather, this species’ continued existence as the risk lies in the accreditation and scientists grapple with the ethical categorisation of these investments. dilemma of artificial propagation. Given the detail and nuance involved Even if we resolve to restore these in cataloguing thousands of products, majestic creatures on the African accreditation agencies have no choice savannah, it may already be too late but to rely on , logic rules from a biological perspective. and yes/no decisions. In so doing, we must accept that the risk of Najin and Fatu stand as physical mascots greenwashing – the process of creating for the relentless attack many species an impression, even if false, of a have been suffering as human activities product’s environmental friendliness demand ever-more of nature. Wildlife – and other methods of gaming the populations have plummeted by more system are real. As capital providers and than two-thirds in the last 50 years, custodians, we may feel that the real according to a recent report by the responsibility of sustainability is a step World Wildlife Fund. removed from our activities, but this does not nullify the responsibility that These stories are usually told from lies squarely before us. Perhaps there the perspective of nature’s fight for is merit to re-fitting the lens through survival, but in so doing we succumb which we perceive the problem. to the myopic view. We should not view our relationship with nature as I want it all, and I want it now a win/lose game where one side is I will conclude this article by striking sacrificed for the benefit of the other. one more anecdote that should be Our sustainability is incontestably close to home for readers based on dependent on our environment. the African continent. The last two Ecological and social destruction has northern square-lipped rhinos on a tipping point beyond which there earth, Najin and Fatu, live in a 700- is no return. We should remember Prudential Investment Managers ©

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the farmer from Aesop’s fables who wanted it all, before we lop off the head of our goose laying golden eggs.

There are no easy answers, but love is a good starting point The questions, associated debates, missives and compromises related to sustainability are far too complex and nuanced to address in a few paragraphs. But I invite you, dear reader, to consider the usefulness of the infinite game as a framework to aid in unravelling some of these complexities. When you boil it down, sustainability is more akin to matters of the and is best served when you love the game. Sustainability is not something “won”, but something that prevails over time.

With 15 years’ investment experience, Aadil joined Prudential in July 2013 as an Equity Analyst. In August 2018 he joined a global equity hedge fund in London, before returning to Prudential in January 2020 as Head of Equity Research and joint-Portfolio Manager of the Prudential SA Equity Fund. He holds a BCom degree (Hons, cum laude) from the University of Pretoria and a Masters in Finance degree from INSEAD. He is also a CFA charterholder. Prudential Investment Managers ©

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