In a recently filed shareholder resolution, an activist group called the Nebraska Peace Foundation (NPF) asks Berkshire Hathaway’s insurance division to prepare a report describing the division’s responses to climate change risks. The report “should include specific initiatives and goals relating to each risk issue identified.” In a letter to shareholders dated February 27, 2016, Berkshire Hathaway Chairman and CEO Warren Buffett explains why Board of Directors unanimously opposes the resolution.
Today’s post examines Buffett’s argument, which straddles fences in ways you might not expect. Before diving into it, I should note that NPF owns exactly one share of Berkshire Hathaway stock. That’s enough to entitle NPF to submit a shareholder resolution but nowhere near enough to give those ‘investor activists’ a stake in the company’s financial health.
For years climate campaigners have used shareholder resolutions to demand that companies with fossil-fuel investments or customers confess their unsustainability in the supposedly inevitable carbon-constrained future. The classic case is Campaign ExxonMobil. In the name of protecting shareholder value, the campaigners tried to persuade Exxon to scare away its own investors–a tactic that, if successful, would bankrupt the company and harm shareholders. NPF is part of the same movement, although its goal may simply be to turn Berkshire Hathaway into yet another multi-billion dollar mouthpiece for the so-called climate consensus.
The remainder of this post reproduces the portion of Buffett’s letter that explains why the Board opposes the NPF resolution (pp. 24-25). Buffett’s text is in maroon and preceded by the initials WB. My comments are in standard black and indented.
WB: I am writing this section because we have a proxy proposal regarding climate change to consider at this year’s annual meeting. The sponsor would like us to provide a report on the dangers that this change might present to our insurance operation and explain how we are responding to these threats.
This is standard fare in climate shareholder campaigns. Typically, the goal is to get the company to acknowledge that climate change threatens its profitability, undermining investor confidence while seeming to validate campaigners’ demands that the company divest its holdings in fossil-energy assets and invest instead in renewables. BH doesn’t invest in energy companies, so the goal is more likely to influence public opinion by making Buffett a mouthpiece for climate alarm.
WB: It seems highly likely to me that climate change poses a major problem for the planet. I say “highly likely” rather than “certain” because I have no scientific aptitude and remember well the dire predictions of most “experts” about Y2K. It would be foolish, however, for me or anyone to demand 100% proof of huge forthcoming damage to the world if that outcome seemed at all possible and if prompt action had even a small chance of thwarting the danger.
Buffett does not deny that climate change is a “major problem,” considering it to be “high likely.” Nonetheless, Y2K makes him at least somewhat skeptical of “the dire predictions” of “experts.” It would be ”foolish” for anyone to demand “100% proof of huge forthcoming damage. . .if that outcome seemed at all possible and if prompt action had even a small chance of thwarting the danger.” But what if proof is far less than 100%? What if some of the worst alleged damages (e.g. Atlantic Ocean circulation collapse, great ice sheet collapse, and catastrophic methane release from melting permafrost) are highly unlikely during the 21st century? What if prompt action won’t make any measurable difference for many decades (if ever)? Buffett’s text invites such questions even if it does not explicitly raise them.
WB: This issue bears a similarity to Pascal’s Wager on the Existence of God. Pascal, it may be recalled, argued that if there were only a tiny probability that God truly existed, it made sense to behave as if He did because the rewards could be infinite whereas the lack of belief risked eternal misery. Likewise, if there is only a 1% chance the planet is heading toward a truly major disaster and delay means passing a point of no return, inaction now is foolhardy. Call this Noah’s Law: If an ark may be essential for survival, begin building it today, no matter how cloudless the skies appear.
Billions of people believe in God. How many were actually persuaded to do so by Pascal’s wager? Is it even reasonable to decide questions of faith based on risk probabilities? Buffett here adopts a variant of the precautionary principle (PP), the idea that if there is any risk unconstrained economic activity could lead to irreversible environmental damage, the activity should be banned, phased out, or at least tightly restricted. The problem is that the PP is one-sided or biased, hence is not really a principle but a rhetorical weapon. The only risks deemed to be unacceptable are those arising from economic activity. Risks arising from regulation are not even acknowledged. The result is regulatory recklessness based on the pretense that government can do no harm.
As Buffett surely knows, the real world abounds in risk tradeoffs. There are risks of over-regulation as well as under-regulation. To paraphrase Buffett, if there is only a 1% chance that the Paris climate agreement would harm the poorest of the poor, then adoption of the agreement is foolish.
All analogies are imperfect but Noah’s Ark bears little likeness to climate policy. Noah was a private steward. He did not tax anyone to build the Arc nor commandeer anyone’s resources through regulations and edicts. Anti-carbon regulations provide no shelter from the storm if it strikes. Indeed, affordable energy makes people less vulnerable to storms, droughts, and floods, energy poverty more vulnerable.
WB: It’s understandable that the sponsor of the proxy proposal believes Berkshire is especially threatened by climate change because we are a huge insurer, covering all sorts of risks. The sponsor may worry that property losses will skyrocket because of weather changes. And such worries might, in fact, be warranted if we wrote ten- or twenty-year policies at fixed prices. But insurance policies are customarily written for one year and repriced annually to reflect changing exposures. Increased possibilities of loss translate promptly into increased premiums.
Bravo. Before people go introducing shareholder resolutions, they should have some basic business understanding of the industry they seek to control. Insurance premiums are “repriced annually to reflect changing exposures. Increased possibilities of loss translate promptly into increased premiums.” Climate change isn’t necessarily bad for Berkshire Hathaway. It might actually be quite profitable.
WB: Think back to 1951 when I first became enthused about GEICO. The company’s average loss-per-policy was then about $30 annually. Imagine your reaction if I had predicted then that in 2015 the loss costs would increase to about $1,000 per policy. Wouldn’t such skyrocketing losses prove disastrous, you might ask? Well, no. Over the years, inflation has caused a huge increase in the cost of repairing both the cars and the humans involved in accidents. But these increased costs have been promptly matched by increased premiums. So, paradoxically, the upward march in loss costs has made insurance companies far more valuable. If costs had remained unchanged, Berkshire would now own an auto insurer doing $600 million of business annually rather than one doing $23 billion.
Yup, climate change could be a windfall for Berkshire Hathaway and, presumably, many other insurance firms.
WB: 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.
Bravo again. So far climate change has not pumped up Berkshire’s bottom line because it “has not produced more frequent nor more costly hurricanes nor other weather-related events covered by insurance.”
WB: 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.
A polite but firm rebuke to those who believe climate change should be everyone’s top priority 24×7.