Warren Buffett’s annual letter to shareholders of Berkshire Hathaway is required reading for investors of all kinds, both for its investment insights and Buffett’s folksy wisdom on many subjects.
In his wide-ranging letters, there’s one topic that’s seldom mentioned – climate change. That is until this year, when Buffett warned that wildfire-related losses at one of Berkshire’s electric utilities could doom its energy business.
For years Buffett waved off the risk that climate change could affect Berkshire’s businesses, a mix of insurance, manufacturing, railroads, utilities and consumer goods. Buffett has said many times, for example, that climate change is not a “material risk” to Berkshire’s insurance business.
Since insurance is renewed annually, his argument goes, the risk from climate change is reflected in policy premiums immediately. (Left unsaid, however, is whether customers might simply opt out of coverage instead of paying higher premiums, sharply reducing Berkshire’s volumes and revenue. Also unexplored is whether losses under policies it has already written might be greater than expected as climate change magnifies hurricanes and other severe-weather events. We’ll leave both matters to a future post.)
But as Buffett was dismissing the risks to Berkshire’s insurance holdings, its utility business was feeling the heat from its growing climate risks – quite literally. PacifiCorp, a utility serving northern California and other western states and one of Berkshire’s largest holdings, faces billions of dollars in potential liabilities for its alleged role in contributing to the wildfires that ravaged the region in 2020. Buffett’s 2023 letter openly questioned whether PacifiCorp, or indeed the entire electric utility sector, could survive. The 2019 bankruptcy of California utility Pacific Gas & Electric, which was saddled with a crippling $30 billion in estimated fire liabilities, surely must be on his mind.
Even with all this, the current Berkshire Hathaway annual report is mostly silent on climate change and its possible risks and what the company is doing to mitigate them. In fact, the words “climate change” are mentioned just six times, in the litany of operating and legal risks related to the effects of changing weather on Berkshire’s physical assets and possible regulatory changes regarding carbon emissions.
There’s no discussion of how Berkshire’s board assesses or manages these risks. The TCFD guidelines and other climate-disclosure frameworks that have become a familiar part of other corporate reports are absent. (A 2021 shareholder resolution to compel Berkshire to say more about climate risks failed to win majority support.)
Once the SEC releases its climate disclosure rules – rumored to be out later this week – Berkshire will have to address these issues. It should make for interesting reading indeed.