Warren Buffett’s letter is a mass of contradictions on climate risk

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In his latest shareholder letter Warren Buffett said his company Berkshire Hathaway, at its size and maturity, should “operate with materially less risk of permanent loss of capital”. A few pages later, the Oracle of Omaha seemed to contradict himself.

Berkshire Hathaway Energy is one of the largest power utilities in America. Such infrastructure businesses, Buffett noted, are most often operated as natural monopolies for which equity returns are mandated by state regulators. Such a system allows the utility to securely make long-term, expensive investments in electricity and gas generation as well as transmission equipment. It is as steady and dull as it can be.

Until now. Berkshire Energy’s PacifiCorp is facing, in the worst case, tens of billions of dollars in civil liability for the alleged role its equipment played in multiple wildfires that raged in California and Oregon in recent years after lightning strikes. Even as Berkshire’s overall operating earnings soared in 2023 its energy unit’s profits fell more than 40 per cent, which included nearly $2bn of “estimated probable wildfire losses”. 

Buffett ominously hinted at some sort of regulatory bailout or relief, noting the conundrum of America increasingly needing more power when the liability from climate change could discourage necessary investment.

Luckily, 2023 was a relatively mild year for hurricanes. That helped mitigate any massive losses for Berkshire’s all-important property and casualty insurance segment. Profits here jumped. Even as insurers have benefited from sharply raising premiums, increasing “convective” (severe) thunderstorms or hurricanes are making insurance another business facing day-to-day climate risks.

Buffett in the same letter took a bow for his stake in Occidental Petroleum, one he expects to maintain “indefinitely”. The oil and gas driller, he wrote, was essential for America’s energy independence. The role of oil and gas drilling and consumption at the centre of the climate crisis went unacknowledged, as did the risks that creates.

Two US utilities in the west, PG&E and Hawaiian Electric, have faced steep financial distress from wildfire liabilities in recent years. PG&E filed for bankruptcy and HE may eventually have to do the same in order to settle claims efficiently. It would be extraordinary if Berkshire Hathaway Energy was forced into a similar gambit.

Buffett warned that the costs of climate change for utilities like his may be so vast and uncertain that governments rather than merely regulating private sector firms could be forced into becoming operators themselves in order to fill the void.

The Nebraskan has always had a sunny outlook for the US and, by extension, his powerhouse. Despite the contradictions, his worry about climate’s storm clouds should be treated as a marker.

Lex is the FT’s flagship daily investment column. If you are a subscriber and would like to receive alerts when Lex articles are published, just click the button “Add to myFT”, which appears at the top of this page above the headline

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