Warren Buffett’s annual shareholder letter was full of folksy charm and investment wisdom. But it had little to say about how he and the Berkshire Hathaway board are handling climate risks for the sprawling conglomerate.
Mr. Buffett has never shied away from speaking his mind, whether on tax reform, accounting policies, derivatives, executive pay, hedge funds or the virtues of drinking Cherry Coke every day.
So it is strange he has so little to say about the business risks stemming from climate change, even though Berkshire operates one of the world’s largest property & casualty insurance businesses.
Berkshire’s 2017 financial results, released a few days ago, show its insurance unit posted a $3 billion pre-tax underwriting loss as a result of three major hurricanes that strafed Florida, Texas and Puerto Rico. It was the first loss for the business in 14 years.
Does Berkshire expect storms to be more frequent or severe in the future because of a changing climate, as some experts believe? Buffett doesn’t say.
Indeed, the words “climate change” appear just three times in the company’s 125-page annual report, in a discussion of the regulatory risks that could affect its utilities and pipelines unit, Berkshire Hathaway Energy.
To be fair, Mr. Buffett briefly addressed the issue of climate change two years ago in his annual letter. It was in response to a shareholder resolution proposing that Berkshire prepare a report on the risks to its insurance business from climate change. He said it was “highly likely that climate change poses a major problem for the planet,” but it was not a major worry for Berkshire. Annual contracts help shield insurers from long-term risks, he wrote, and forecasts of higher climate-induced losses might actually boost premiums and help its insurance business.
Presumably, Mr. Buffett’s views on climate change haven’t changed since that time, despite the multibillion loss in the insurance unit. (The shareholder resolution failed to pass in 2016, but it’s likely to be back on the agenda at the 2018 meeting, for the third straight year.)
What’s more puzzling is that Mr. Buffett ignored the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). Its report urged companies to disclose material financial risks presented by climate change, and it was endorsed by a long list of prominent investors and corporations, including many insurers.
The report suggested some fairly simple steps companies could take as a starting point on climate disclosure. One is presenting the governance process for assessing and monitoring climate risks and discussing how current and future climate-related risks could affect the company’s strategy.
Or more simply: Who’s in charge of monitoring climate risks? How often is it discussed by the board? How does it factor in to capital allocation and acquisition decisions? None of these questions was addressed in Berkshire’s financial reports this year.
How could the transition to a low-carbon economy affect Berkshire’s businesses? Burlington Northern’s rail system, to pick one example, ships a lot of coal that isn’t likely to be part of a clean-energy future.
You don’t need complex climate models to discuss governance and strategy.
Of course, Berkshire’s size sets a high bar for measuring the materiality of any financial risk. One of the benefits of running a $500 billion conglomerate is that you don’t have to say anything about a financial risk until it gets really big. Investors on the other hand worry about what lurks beneath the materiality threshold, which is one reason conglomerates trade at a discount.
Berkshire doesn’t lack for experts when it comes to climate matters, either. Its energy unit has made major investments in renewables in recent years, so someone has been doing some serious thinking about climate risks and opportunities.
Mr. Buffett has led the pack on other financial disclosures that were important to understanding a company’s health. He was an early and vocal advocate for expensing stock options, for example, at a time when most companies buried those costs in a footnote.
He missed a chance to lead on climate disclosure.