Sectornomics: Energy

Warren Buffett on climate change: Friend or foe?

Tim Mullaney, special to

Rob Berridge owns Berkshire Hathaway stock, mindful at just a young age of the clear-sighted business savvy that defines Warren Buffett: His best friend's father was one of Buffett's closest pals at Wharton School of Business and Columbia University.

But Berridge, now director of shareholder engagement at Boston-based Ceres—which advises institutions like BlackRock on sustainability issues—argues that one of Buffett's signature gifts seems to disappear when the issue is climate change.

"One of the best communicators in the world isn't sending a clear statement—he's giving a mixed message," said Berridge. "He'll undoubtedly go down as one of the world's greatest investors and most ethical businesspeople. With climate change having such an important impact on the largest parts of his business, we'd love to see him be clearer."

Lacy OToole | CNBC

Berkshire Hathaway Energy, the company's utility arm, is investing up to $30 billion in renewable-energy sources—principally wind—but its biggest single utility uses almost twice as much coal as the national average. The energy subsidiary's homepage is crowded with images from solar projects and prominently features the stat that roughly one-quarter of its generating capacity comes from renewable and non-carbon sources.

But Berkshire's Burlington Northern Railroad carries enough coal to provide 10 percent of U.S. electricity, according to Berridge, generating $5 billion of revenue for the railroad last year. Buffett and his right-hand man, Charlie Munger—not just Berkshire's chief operating officer but also a trained meteorologist—have said they broadly agree that man's activities are causing global warming, but they've also said they don't yet see any impact on Berkshire's giant insurance businesses and don't know when they will.

So is Buffett a friend or foe of the environment? In both words and deeds, Buffett seems to alternately comfort and bedevil each camp in the climate change debate.

The next chance for Buffett to make his views on climate change clearer will come at Berkshire's annual meeting May 2, when a shareholder resolution will call on Berkshire to set goals for greenhouse-gas emission reductions. The resolution has failed four times before, with Buffett and his company's management opposing it. On the last try, the measure received only 8 percent of the shareholder vote, less than earlier efforts to pass the resolution garnered from Berkshire shareholders. Notably, other utilities—including American Electric Power, Consolidated Edison, Duke Energy, Entergy and Exelon—have approved similar plans, Berridge said. Utilities use about 85 percent of the coal burned in the U.S., according to Moody's Investor Service.

"Establishing reduction goals at this time, as environmental regulation and legislation remains uncertain, would be contrary to the responsibilities of our rate-regulated utilities and to our customers, whose utility bills could be dramatically affected," Berkshire's board said in opposing last year's resolution.

Berkshire is a profit-making corporation whose modus operandi is to allocate capital to the highest-yielding business. It's pretty agnostic about what the production input is.
Lawrence Cunningham
George Washington University law professor and author of 'Berkshire After Buffett'

Berkshire's lack of clarity on climate is a function of the conglomerate's structure and two of Buffett's management tenets, said Lawrence Cunningham, a George Washington University law professor and author of "Berkshire After Buffett." First, Buffett lets the heads of Berkshire's operating businesses—in this case, Berkshire Energy president Greg Abel and Burlington Northern CEO Matthew Rose—make their own key decisions with little oversight.

The other is that there has never been much relationship between Buffett's personal opinions and what Berkshire does, Cunningham said. Just as Berkshire tries to minimize its tax bill despite Buffett's support for higher taxes on the rich, so Berkshire will make business decisions with little regard for Buffett's personal feelings about climate.

"Berkshire is a profit-making corporation whose modus operandi is to allocate capital to the highest-yielding business,'' Cunningham said. "It's pretty agnostic about what the production input is."

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That kind of detachment isn't very characteristic of the climate debate, and it's pulling Buffett's utilities into the crosshairs of activists and state legislators. Berkshire's "utility and energy business" represented roughly 9.5 percent of Berkshire's $19.9 billion in 2014 profit.

A wind farm managed by Berkshire Hathaway Energy in Marshalltown, Iowa. Iowa, Kansas and the country of Denmark are the world's three leading producers of wind energy.
Timothy Fadek | Bloomberg | Getty Images

In Iowa, environmentalists cheer what Berkshire's MidAmerican Energy unit is doing: It is expecting to generate as much as half of its power from wind by 2016 (up from roughly 30 percent now), and the company is retiring four of its 11 coal-plant units by April 2016. MidAmerican's territory of Iowa, Illinois, South Dakota and Nebraska is where Berkshire is spending the largest part of the $15 billion for renewables. In comparison to most U.S. states, Iowa and South Dakota already generate roughly one-quarter of their energy from wind (wind represents 5.7 percent of electricity generation nationally, according to The Wind Foundation).

Berkshire's Nevada utilities, bought in 2013, get almost two-thirds of their juice from natural gas and most of the rest from coal. But they are closing coal plants by 2017 and selling its stake in the giant coal-burning Navajo Generating Station by 2019. Plans also call for adding almost 600 megawatts of renewable power and gas-fired units to help replace them.

A (hot)house divided

That energy mix is fine, environmentalists say, but Berkshire's biggest utility is another story. Portland, Oregon-based PacificCorp, which serves parts of six states, gets almost 70 percent of the power it generates from coal. That's way above the 39 percent national average reported by the U.S. Energy Information Agency. PacificCorp hasn't cut its dependence on coal since 2012 and is investing $2 billion to extend coal plants' lives, mostly in pollution-control gear, said Bill Corcoran, regional director for the Sierra Club's Beyond Coal Campaign.

"Berkshire's utility empire is a house divided," said Corcoran. "There are two different visions being pursued under the leadership of Greg Abel.''

A Burlington Northern Santa Fe train moves through a coal-loading silo in Gillette, Wyoming
Robert Nickelsberg | Getty Images

That's a key point: The decisions environmentalists quibble with often aren't made by Buffett or Berkshire's home office in Omaha. They're made by executives like Abel or Burlington Northern's Rose. The railroad is also hamstrung by regulations, BNSF spokeswoman Roxanne Butler said. "We're required to carry anything the customer wants to ship,'' she said.

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The utility house is going to get less divided, maybe sooner than Buffett wants. A bill pending in PacifiCorp's home state of Oregon calls for phasing out the use of coal-fired electricity completely by 2025, whether the plant is based in the state or not.

"The coal plants are aging," said the bill's sponsor, state Rep. Tobias Read, a Democrat from Beaverton. "We are going to choose one thing or another—reinvesting in the coal plants or doing something else. Clearly, wind is an element of that; solar is an element of that. Natural gas is OK, too."

Berkshire Energy and Burlington Northern declined to comment, and Berkshire Hathaway corporate headquarters in Omaha didn't respond to a request for comment.

A calculating man calculating catastrophe

Over time, Berkshire's biggest exposure to climate change is in its reinsurance business, where any losses from the oft-predicted floods and other disasters would end up landing. But the reinsurance market isn't sending any signals that it expects warming to produce a spike in such claims anytime soon, said Morningstar analyst Brett Horn.

Indeed, premiums for reinsurance sold to property and casualty insurers have actually been falling, and there's a glut of capital that wants to sell coverage, Horn said. The problem is that it's next to impossible to build actuarial models for events that have never happened and which aren't expected to reach their full impact for many decades to come. Claims data have varied year-to-year, with no clear buildup of warming-related storm losses, he added.

That's close to what Buffett said on CNBC last year when he said earthquakes in New Zealand are a bigger current insurance threat than U.S. hurricanes. He even joked that he loves "apocalyptic predictions" that help Berkshire make money.

"So far, the effects of climate change, if any, have not affected the insurance market," Buffett said. "I calculate probabilities of catastrophes no differently than 10 years ago. That may change in 10 years. ''

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Even if storms begin to get more frequent and worse, the slow-moving nature of climate change means reinsurors like Berkshire will have time to adjust, Horn said. They'll be able to exit the most-affected lines of business or even share risks with government flood-insurance programs. "Berkshire has shown they are willing to walk away if pricing is too low, and just not write the policies,'' Horn said. "The thing with insurance is that there's always a price at which it makes sense.''

The best way for activists to shift Berkshire's climate change stance may be to keep pressing Buffett at annual meetings until he takes the issue more personally, Cunningham said. There's some precedent for this: Berkshire's Fruit of the Loom unit implemented reforms and recognized unions after protests by anti-sweatshop activists, including showing up at the annual meeting, Cunningham said.

Berridge said Buffett has argued that Berkshire should wait for the government to give more clarity about future carbon and greenhouse-gas standards before moving aggressively to reduce coal use. While that guidance may or may not come soon, the activist said it's just good management for Berkshire to set its own course sooner.

"Without a goal, it's hard to get your mind around whether the business is headed down a clear path or not,'' Berridge said. "With climate change having such an important impact on the largest parts of his business, we'd love to see him be clearer."

By Tim Mullaney, special to