Berkshire Hathaway is one of the best run public companies of the 20th century, with the financial performance to prove it. But as the 21st century brings a new generation of investors shifting from pure shareholder capitalism to the stakeholder capitalism aligned with environmental, social and governance mandates, is Warren Buffett’s company positioned to be an ESG leader or laggard? The answer isn’t so simple.
Look at the ESG rankings — far from perfect methodologies at this early stage of the industry’s development — and the answer isn’t kind to Berkshire. Whether it’s MSCI ESG or the scorecard from ESG specialist JUST Capital, Buffett is in a position he isn’t used to: near the bottom.
But by some operating business measures, Berkshire Hathaway — just by doing what it does — is delivering on ESG. Berkshire Hathaway Energy, its utility company, is the biggest producer of wind energy in the U.S. Buffett’s largest stock holding, Apple, is consistently ranked among the best ESG companies in the market. On diversity, Berkshire just elevated the first-ever female CEO to run a U.S. railroad company, at Burlington Northern. Its board includes a Black director (Ken Chenault), an Indian director (Ajit Jain) and four women. But turnover of the board has been, according to Berkshire experts, too slow.
The world’s biggest investor votes against Buffett
None of the Berkshire attributes that can be judged as ESG favorable was a factor for BlackRock, the world’s largest asset manger and the biggest force in ESG investing, when it came time to vote in the just-passed proxy season. BlackRock voted against two Berkshire directors — the directors of its audit and governance committees. And it voted with shareholders on requirements that the company produce a climate report and its holding companies produce diversity reports. BlackRock singled out Berkshire Hathaway — a step it takes with only a select group of companies in its annual investment stewardship report — as a company that left it with no choice but to vote against management.
“Berkshire Hathaway has a long history of strong financial performance; however, we had concerns related to our observation that the company was not adapting to a world where sustainability considerations are becoming material to performance. For several years BIS attempted to engage with Berkshire Hathaway, but our requests for direct dialogue were not granted,” BlackRock wrote in the report.
What stands between BlackRock and engagement with Berkshire, may be no more than Buffett himself. And, according to Berkshire experts, there isn’t an expectation that the company will more visibly embrace ESG as long as Buffett is running it.
“He can do what he wants,” said James Shanahan, an Edward Jones financial services sector analyst who covers Berkshire. “I don’t think Buffet cares what Blackrock thinks. He runs the company for Berkshire investors, not BlackRock.”
Even the ESG experts are hesitant, for now, to take to hard a line against Berkshire.
Martin Whitaker, CEO of ESG investing specialist JUST Capital, which was co-founded by hedge fund billionaire Paul Tudor Jones, said the biggest problem with Berkshire Hathaway to date is the lack of disclosure, but that does not mean Berkshire isn’t taking actions that are in line with ESG goals. It means Berkshire just isn’t playing ball with the new way to show the market its ESG credibility. The problem: it’s difficult to give companies the benefit of the doubt when the information isn’t available.
“Look at the history of disclosure of financial performance over the past 100 years. Think of ESG in analogous terms being in the first inning,” Whitaker said. “But if you’re an emissions-intensive company and you’re not disclosing emissions and all your competitors are, then it’s natural people will look and say it’s not good, maybe you’re hiding something. Disclosure has always been a sign of having your act together and being confident about strategy.”
He doesn’t think Berkshire can stick with its current stance forever. “The issue with disclosure is it’s coming, whether they like it or not, people want to know. .. and that journey starts with data and analysis, and at some point they have to start to disclose more,” Whitaker said.
Buffett’s ‘unassailable control’
Buffett still owns a massive stake in Berkshire shares even as he has reached the halfway point of donating his company stock to philanthropy. In announcing the milestone in June, Buffett explained that one of the reasons he chose to make the share gifts gradually was to retain “unassailable control” over the company. That isn’t changing yet.
Shanahan, and others who closely follow Berkshire, are hesitant to say Buffett’s company will ever take an approach to ESG that takes its lead from others. Rather, what ESG will mean to Berkshire could be already embedded in its management approach and its unique structure, decentralized with all the individual affiliate management teams at the operating companies making their own decisions.
“ESG will matter at some point,” Shanahan said. “But more from a business standpoint.”
A good example of that ESG approach is the utility business. In the past, when challenged by shareholders, including one of the most formidable climate scientists in the world, James Hansen of NASA, Buffett said believing that climate change is real on a personal basis does not mean believing it should be the basis for investment decisions. And that is why for a capitalist running one of the largest utility company’s in the U.S., and one of the largest insurance businesses in the world, Buffett’s dismissal of climate disclosure as material to Berkshire shareholders has attracted criticism.
If they focus on ESG through the business lens and financial lens, they will see climate as a big issue. I don’t need them to make a big song and dance about it, but they should be disclosing what they are doing.
Martin Whitaker, JUST Capital CEO
Whitaker, who worked in the insurance industry earlier in his career, said SwissRe began analyzing climate as an economic risk many years ago. Berkshire has a large presence in reinsurance like Swiss Re, and Whitaker noted, “as a reinsurer, you are holding the bag. … I’d be shocked if they are doing nothing on climate, they are in industries which are really in on the long-term climate risk: insurance, infrastructure, transportation, real estate. … they are all now already affected.”
Berkshire’s utility business — and its coal footprint — are changing. The percentage of generation from renewables has been rising steadily, whether in its Iowa wind corridor or in the Southwest where solar is economic as well. The percentage of coal shipments made by Burlington Northern have been going down (though a reflection of the market for coal more than conscious Berkshire strategy). Burlington Northern revenue from coal has declined from over 20% in the 2014/2015 period to 13%, Shanahan noted, while the utility company’s contribution from renewables has steadily increased to over 40% of generation, among the highest in the U.S.
Berkshire’s $10 billion deal for the natural gas assets of Dominion Energy is an example of how the ESG issue can be viewed in more than one way. Natural gas has been taking share from coal for a decade and is a cleaner fuel which is viewed by many as a “bridge fuel” to a fossil fuel-free future, but it isn’t a renewable and it is closely tied to fracking.
“It seems like the environmental footprint is improving,” Shanahan said, and he worries about a company known for making shrewd investments that other investors bail on too quickly, moving to adopt an ESG approach dictated by outside factors.
Buffett invested in natural gas at a time when many ESG investors are critical of any fossil fuels, and invested in Pilot Flying J truck stops and a large network of auto dealerships. At the outset of the electric car and autonomous truck era, it’s easy to see these investments as being out of favor and subject to ESG scrutiny. But Shanahan said if ESG thinking were to prevent Berkshire from making the value-oriented investments that generate a lot of cash flow over the next 10-15 years, it would have the wrong impact on shareholders.
Greg Womack, a long-time holder of Berkshire shares for clients of his investment company Womack Investment Advisers, said it isn’t clear to him if Berkshire Hathaway would fit in an ESG portfolio today, but to date, the financial performance is there, including the most recent quarterly earnings released over the weekend that showed the company rebounding from the pandemic.
Buffett has made an entire generation of American stock market investors wealthy, and mostly a generation of Baby Boomers whose investment process pre-dated the recent rise of ESG. But a post-Buffett Berkshire faces not only the CEO succession issue, but a generational transfer of Berkshire stock among its shareholders. Many current holders may choose to pass down shares rather than sell due to tax considerations, and that has Shanahan thinking about a gradual shift in investment beliefs.
Goldman Sachs sustainability head on the social factors investors focus on
The Edwards Jones analyst said he already is having conversations with investors in their forties and fifties who have been allocated Berkshire shares by parents who have owned for many years and are now in their 80s or 90s. Many have investment views not dissimilar from their parents, but Shanahan said there is a clear change going on among retail investors when it comes to ESG. He thinks it will make at least some shareholders more critical of the Berkshire board and management, and for some, it could become a factor in the decision to hold onto shares (though he said Berkshire being an “old economy” company may weigh just as heavily in a tech-dominated market).
“I don’t think there is a major threat of losing a generation of investors,” Womack said. “At the end of the day, any investment also has to have a good return on money. … You can’t beat its track record,” he said.
The world’s greatest investor versus the ESG index fund
One of the biggest opportunities for Berkshire to show it is changing will be upon succession to a new CEO, Greg Abel, who now runs the company’s utility business, and the opportunity to reconstitute the board, which Shanahan described as one of the most significant opportunities at Berkshire.
“The lack of diversity is striking and warrants major changes in the next few years,” he said, but added, “it’s unlikely to happen while Buffett is there.”
Berkshire’s board does have a diversity problem, according to Lawrence Cunningham, a George Washington University professor and an expert on Buffett and the company, but the problem is about age rather than gender or race. “It leans elderly. The youngest person is 60 and 5 are in their 90s,” Cunningham said. “As Warren leaves, so too will the others who are in their 90s, and Greg [Abel] will have a chance to nominate or appoint younger replacements.”
The Berkshire shareholder base has been changing, not from parent to child as much as from a substantial increase in the percentage of shares held by indexers benchmarked against the S&P 500 Index.
As Womack put it: “Most of your publicly traded companies, the larger ones, over time will be forced by the market to eventually address this.”
The index fund factor is evident in the recent voting results from Berkshire’s annual meeting. The votes against Berkshire management were higher than ever before — still 75% with the board, but roughly 25% in favor of proposals, twice the highest vote against Berkshire’s management on a percentage basis ever, according to Cunningham, which he sees as a growing threat to Berkshire’s decentralized model of management. A multitude of climate proposals over the past decade had never received as much as 10% support from shareholders, and a diversity issue from last year garnered half the support of the more recent vote.
Cunningham doesn’t see individual investors being “conscious capitalists” in these voting results. He sees the hands of the passive investment giants like BlackRock. “The crowd agitating for more tend to be passive index funds and related gurus, not the individual shareholders who have always been the backbone of Berkshire,” he said. “If that trend continues, so will this voting, which is robotic rather than analytical.”
“Blackrock is too powerful, too big and too powerful,” Shanahan said. “Should any passive investor have that kind of market power to influence decisions of public companies and boards?”
Companies that speak loudly about ESG issues like climate but are not making the investments that align with that message, or are even fighting against climate regulation in some cases, may end up getting ESG credit over companies making good fiduciary decisions and generating returns for shareholders but not disclosing more. That’s a problem, Whitaker says. “If they focus on ESG through the business lens and financial lens, they will see climate as a big issue. I don’t need them to make a big song and dance about it, but they should be disclosing what they are doing,” he said.
Buffett’s own history of focusing on an “ownership” mentality should result in his company wanting to lead on these issues and relative to peers. “His philosophy is treat an investment as being an owner, and know about the business you are investing in, and that’s good advice for any ESG investor … To report on climate risk is hugely important and so what are they doing to put my mind at rest about this? It would help a shareholder to know they have this under control,” Whitaker said.
Over time, Cunningham expects Abel to put his personal imprint on Berkshire when a post-Buffett era commences, but also continue the decentralized, autonomous approach “that is baked into Berkshire and runs in Greg’s blood too.”
In his view of Berkshire and ESG, one can see how those who closely charted the success of Buffett and Berkshire Hathaway in the 20th century are concerned about what could come next. “My advice on ESG is to emphasize its traditional and mainstream aspects rather than radical reinterpretations of corporate purpose,” Cunningham said.
