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Thursday, October 13, 2016

Strategic CSR - Warren Buffett

If you are an active investor, you are likely aware that Warren Buffett releases an annual letter to Berkshire Hathaway's shareholders. In this year's letter (released in March), he addressed the issue of climate change. In particular, he analyzed the issue in relation to Berkshire Hathaway's sizeable holdings in the insurance industry. Perhaps surprisingly, he was very bullish on the prospect of widespread environmental degradation:
 
"As a citizen, you may understandably find climate change keeping you up nights. As a homeowner in a low-lying area, you may wish to consider moving. But when you are thinking only as a shareholder of a major insurer, climate change should not be on your list of worries."
 
His reasoning rests on the somewhat ignorant argument that climate change has yet to produce any change in the number of extreme weather events:
 
"Up to now, climate change has not produced more frequent nor more costly hurricanes nor other weather-related events covered by insurance. As a consequence, U.S. super-cat rates have fallen steadily in recent years, which is why we have backed away from that business. If super-cats become costlier and more frequent, the likely – though far from certain – effect on Berkshire's insurance business would be to make it larger and more profitable."
 
As the article in the url below notes, however, this view contradicts the current scientific consensus. I imagine it is also not consistent with those in the north-east of the U.S. who were standing in the way of Hurricane Sandy when it hit in 2012:
 
"This claim flies in the face of growing scientific evidence. In 2014, the federally funded National Climate Assessment stated that: 'Certain types of extreme weather events with links to climate change have become more frequent and/or intense, including prolonged periods of heat, heavy downpours, and, in some regions, floods and droughts.'"
 
Moreover:
 
"Other insurers have already expressed concern about these changes. Carl Hedde, head of risk accumulation for insurer Munich Re America, says: 'The number of loss-relevant, weather-related natural catastrophes worldwide has almost tripled since 1980 […] we do think that the warming climate – depending on region and peril concerned – does play a certain role.'"
 
What is even more striking is the contrast between what Buffett said in this year's letter and what he has said in previous year's letters (as noted in the article in the second url below):
 
"Buffett certainly understands the danger of miscalculating risks. In his 2007 shareholder letter, he wrote that 'devastating storms' like Hurricane Katrina could 'rock the insurance industry.' 'We do know it would be a huge mistake to bet that evolving atmospheric changes are benign in their implications for insurers,' Buffett said then."
 
Buffett has demonstrated similar insensitivity to shifts that are occurring in other industries, too. He has recently reiterated his strong support for the railroad industry (in particular, Burlington Northern Santa Fe), even though between 30 and 40% of revenues in this industry come from the transportation of coal. In banking, I have not seen or heard any demonstrable comments about the recent behavior at Wells Fargo, which has now resulted in the CEO's resignation. And in the food industry, by doubling down on his support for Coca-Cola, not to mention Dairy Queen and last year's merger between Kraft and Heinz, he appears willing to squeeze as much revenue out of these fading brands, irrespective of the healthcare consequences of the salt, sugar, and fat that are stuffed into each of the company's products.
 
As a European living in the U.S., it seems counter-intuitive to me that Buffett should be praised for doing so much good with the fortune he has amassed (by pledging it to the Gates Foundation), without some comment on the social consequences incurred during the accumulation of that fortune. To me at least, doing good with a fortune once you have it does not justify the methods used to build that fortune.
 
Take care
David
 
 
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The big flaw in Warren Buffett's view of climate change
By Thomas P Lyon
March 7, 2016
The Guardian
By Alison Moodie
March 2, 2016
The Guardian