Buffett’s Mixed Messages on Climate Change at the ‘Woodstock of Capitalism’
OMAHA, Nebraska – I didn’t drive a VW microbus to Berkshire Hathaway’s recent annual meeting here, but I did come away from the Woodstock of Capitalism with a question: Will Warren Buffett’s firm take the challenges of climate change as seriously as it does its reputation for delivering hefty returns?
Buffett is well known for huge corporate acquisitions like his recent $23 billion deal for food giant H.J. Heinz. He calls this process “elephant hunting.” But as a long-time shareholder of Berkshire and employee of Ceres, which organizes the Investor Network on Climate Risk, I was interested in a different elephant in the room—climate change.
Berkshire should be concerned about climate change, especially since its subsidiaries, including some of the world’s largest insurers and reinsurers, bear the costs of increasingly extreme weather. Indeed, Berkshire is already paying the price: The company’s GEICO subsidiary paid claims on nearly 47,000 cars flooded by Superstorm Sandy. Overall, that storm cost insurers about $30 billion in losses, and scientists agree there is more extreme weather to come. Even so, a recent survey by insurance regulators and Ceres shows that, with few exceptions, most insurers aren’t working to address climate risks.
Berkshire is not only exposed to climate risks, but is also contributing to their cause—greenhouse gas emissions. Among electric power utilities, the company’s giant coal-burning MidAmerican electric power subsidiary was the sixth largest emitter of carbon dioxide in 2011. As a diversified company, Berkshire can’t simply avoid the negative externalities of its own carbon footprint. It’s paying the cost in other parts of its business.
So what is the world’s greatest investor to do?
Well, for starters, invest in solutions. In addition to its coal-fired power plants, Berkshire actually owns more wind power generation capacity than any other company in the U.S., and Buffett’s recent multi-billion dollar investments in several massive solar projects make the company a leader in solar as well. In the wake of the shareholder meeting, Berkshire announced it would invest another $1.9 billion in wind power in Iowa.
It’s important to note that Buffett’s firm invests in renewables projects—wind farms and solar parks—which tend to have much lower risk than investments in renewables equipment manufacturers. Ceres is working to promote national policies like the MLP Parity Act, which would make it easier for other investors to earn a return on renewable energy projects.
Policy changes are a key solution to the climate crisis, and Berkshire’s executives appear to recognize their power. In fact, while answering a shareholder’s question on climate change, Buffett’s business partner Charlie Munger effectively endorsed a carbon tax. “I think that carbon trading is pretty impractical,” Munger said. “If you want to change behavior, the correct answer is carbon taxes.”
Even so, those same economic signals are not working their way into Berkshire’s methods for pricing its products. One shareholder asked whether climate change would affect the cost of insurance policies, and Buffett responded, “I don't think that it makes any real difference in assessing insurance prices from year to year,” citing uncertainty over the probability of catastrophes. It’s difficult to follow this line of reasoning given that private insurers have largely withdrawn from Florida’s homeowners insurance market due to climate-influenced hurricane risks, which have surely influenced rates.
Berkshire will have to address these internal dilemmas sooner or later, and shareholders are asking the firm to begin by setting a reasonable goal to reduce its greenhouse gas emissions. In the opposition statement to the proposal in the proxy statement, Berkshire recommended voting against this proposal because greenhouse gas regulations are still pending. Yet, after the resolution was presented, a shareholder representing John Doerr, the legendary venture capitalist who made early investments in Amazon and Google among other iconic companies, stood up to say that she and Doerr hope that Berkshire will support the resolution next year.
It’s easy to see why. Berkshire’s MidAmerican is spending $180 million to upgrade two coal plants in Northwest Iowa with new controls for mercury and other hazardous pollutants in order to meet new regulations. So, while waiting for greenhouse gas regulations, Berkshire is effectively placing more bets on coal. Though Buffett is shuttering some coal boilers and switching others to natural gas after a recent legal settlement with the Sierra Club, without greenhouse gas reduction goals, investors have no direct way to determine whether Berkshire will pursue a lower or higher carbon emissions path in the future. Buffett did not comment on the resolution during the meeting except to say that it did not receive a majority of votes—8.8 percent according to Berkshire’s recent 8-K filing.
That vote, though seemingly low, should be put into context. Berkshire’s managers and officers control more than 38 percent of the company’s shares, and they all voted against the resolution. The “for” votes would surely be higher if such a hefty percentage of Berkshire shares weren’t controlled by management.
The bottom line: Berkshire Hathaway’s managers are sending mixed signals on climate change—investing in renewables on one hand and rejecting GHG reduction goals on the other. This, despite a strong scientific consensus on the urgency for reducing greenhouse emissions. Buffet should be acknowledging this fact-based reality, and Berkshire shareholders should remain vigilant in pressing him on this.