Climate Change, Diversity, Inclusion: Where Warren Buffett Stands
By: Wenxi Zhang
Check Out Where Warren Buffett Stands on These Issues
Billionaire, philanthropist and business magnate Warren Buffett chairs and runs Berkshire Hathaway (BRK), his main investment vehicle. In May 2021, the $630 billion conglomerate turned down two shareholder proposals asking the board to publish its approach to climate change and diversity and inclusion issues in annual reports. Buffet, who holds about a third of the firm’s voting shares, opposed the resolution thus, deciding the outcome (Merced). His opposition is despite immense investor interest in ESG-related (environmental, social and governance) information. Nevertheless, a significant 25% of Berkshire’s shareholders still voted in favour of the disclosure proposals during the company’s annual meeting (Abbott). Berkshire investors with $1.9 trillion worth of assets also released a statement highlighting the importance of transparency around workplace equity data in 2020 (Nawrat).
As the investment industry and public pay increasing attention to climate and diversity issues, many leading investment firms, such as BlackRock, have committed towards incorporating relevant considerations in investment strategies. In contrast, some investors wonder if Buffet is out of touch with the industry at large in refusing to follow suit. Dan Bakal, Senior Director of sustainability non-profit Electric Power at Ceres, warned that failing to address climate change issues puts Buffett’s businesses under systemic risk. Robert Eccles, tenured Harvard Business School Professor, also strongly urged Buffett to change his vote and recognise the potential impacts of climate change on the company. However, Berkshire Hathaway’s board maintained a unanimous recommendation in its proxy statement that shareholders vote against the disclosure proposal. The board bases its recommendation on the firm “managing its operating businesses on an unusually decentralised basis”, rendering the environmental and diversity information unnecessary. In the same proxy statement Berkshire acknowledged the importance of both climate change and a diverse and inclusive work force. Although this acknowledgement seems paradoxical, Buffett himself has notably always drawn a clear division between his personal views and how he runs Berkshire Hathaway for shareholders (Rosenbaum). Even if he does not oppose the importance of ethical issues, they take secondary importance if he believes prioritizing ethics comes at the expense of maximising shareholder value.
Buffett’s Investment Philosophy
As arguably the greatest investor of our time, the roots of Warren Buffett’s success lie largely in his “value investing” philosophy. The core of his strategy is simple – he identifies under-priced companies he believes will perform well in the future, then holds the shares over the long-term (Hagstrom, p. 60, 2014). To Buffett, stock performance ultimately depends on the profitability and success of the company. Indicators of sustained performance include consistency of track records, such as affirming financial reports. Buffett is famously averse to industries with which he is unfamiliar. This approach traces back to his acquisition of the then textile milling company, Berkshire Hathaway. Although the company’s shares were clearly under-priced, he failed to factor in the systemic risk of the entire industry during its sunset stage. After the massive loss suffered from this acquisition, Buffett has since focused on mature industries such as oil and banking. Therefore, instead of adopting a diversified portfolio, he puts a high level of faith in stocks he hand-picks according to their operational potential. This strategy allows his portfolio to have low correlation with the wider stock market and potentially outperform, regardless of economic downturns.
With Buffett’s investment principles, Berkshire Hathaway managed to sustain 20% growth for a continuous period of 50 years since it began trading in 1965. This remarkable achievement indubitably makes Buffett deserving of the title ‘Oracle of Omaha’. However, focus on value as the only criteria for investment makes him fall short on ethical considerations in investment decisions. On more than one occasion, Buffett expressed his indifference towards ethical considerations in investment, as long as his portfolio of stocks have durable competitive advantage. Berkshire’s portfolio reflects this approach, i.e. the stocks comprise mostly large and mature company shares that fit his selection criteria but may not be environmentally and socially responsible.
However, given the rising significance of climate change and diversity issues in today’s investment industry, Buffett may be subjecting his empire to both reputational and monetary risks if he continues to disregard these factors in investment. In fact, the disadvantages of his approach have already manifested on Berkshire’s past trends.
Berkshire’s total returns closely mirrored the S&P 500’s since 2011. It even visibly underperformed the S&P 500 in 2020 as the COVID-19 pandemic emerged (Rhodes). In the past decade, Buffett no longer consistently outperformed the market as he did in the past. This decline in performance comes in tandem with the rise of climate change and diversity considerations in investment. Given the potential correlations, it is important Buffett recognises how these ethics related factors can create value for Berkshire, rather than impede its growth.
Importance of Climate Change & Diversity and Inclusion
Climate change may be the most pressing crisis looming over our planet. With rapid industrialisation and environment-damaging human activities over the past decades, the future of earth is at risk of being non-conducive for survival unless humanity takes prompt action. As more people become aware of the situation, the demand for climate-friendly products has risen. More than half of ESG funds delivered higher returns than equivalent conventional funds in recent years (Riding). Conversely, disregarding climate change issues poses severe risks to investment firms. Such risks are applicable to Berkshire Hathaway, which relies heavily on its largest business line of insurance (Rosenbaum). Climate change has direct impact on the escalation of natural disasters, which adversely affects insurance claims. For instance, in 2017, climate-induced wildfire insurance claims almost quadrupled to $16 billion from $4.2 billion in 2016. Hence, from both ends of profit maximisation and loss aversion it is essential to not brush off the importance of climate change factors in investment.
Similarly, diversity and inclusion also have a range of benefits that should not be ignored. Not only is it ethical to provide fair hiring and promotion opportunities for people of different races, genders, and backgrounds, there’s a strong business case for employing a diverse group of individuals in a team (Nawrat). Having a team that comprises very similar people tends to give rise to the groupthink problem (Almeida and Lordan), whereas diverse individuals can merge different perspectives, improving creativity (Holvino, Ferdman and Merrill-Sands). Practicing inclusion also helps management overcome cognitive biases, including the familiarity bias and confirmation bias. Employees can help to identify each other’s loopholes in thinking. As such, the investment industry is placing increasing focus on diversity and inclusion as data point towards its tangible benefits. Companies with equal gender proportions in its workforce produce 41% higher revenue; 43% of companies with diverse management saw higher profits (Jacimovic).
However, despite having expressed personal support for these causes, Buffet still separates them from his managerial and buying and selling decisions.
Climate Change
Berkshire Hathaway is on a global list of 167 companies compiled by Climate Action 100+ as the largest corporate greenhouse gas emitters of the world. However, both Warren Buffet and vice president Munger appear indifferent to such indicators of unethical investing. They dismissed climate change issues in investment and simply said, “the world will adapt”.
This attitude has been consistent. In 2014 Buffett summed up his rejection of climate proposals succinctly at the 2014 Berkshire annual meeting: “I don’t think in making an investment decision on Berkshire Hathaway, or most companies — virtually all of the companies I can think of — that climate change should be a factor in the decision-making process.” Despite stark rises in climate-related insurance claims, he stood firmly by the stance that “annual insurance pricing is not climate-sensitive”. He declined to create models tailored to climate change like other insurance companies have, even after Berkshire’s insurance subsidiary Geico suffered its greatest loss ever from Superstorm Sandy, where $490 million was claimed on more than 46,000 flooded vehicles.
Vice Chairman and right-hand man to Buffett, Greg Abel, did mention what Berkshire Hathaway Energy was doing to manage the risks and opportunities of climate change. However, the relevant information cannot be easily found on the company’s website for reference. In 2021, only 15 of 63 sustainability reports of Berkshire Hathaway’s operating companies can be found on the main website, while none is published for the parent company. Among most of communication published, reports were also criticised as “glossy but pretty thin gruel” (Eccles).
Buffett’s take on climate change issues is reflected in his stock selection. Berkshire Hathaway invests heavily in industries and firms that contribute to exacerbating climate change. Clearly, alleviating global warming is not one of Buffett’s considerations in portfolio construction.
Case Studies
1. Chevron Corp.
Berkshire Hathaway holds more than $2.4 billion worth of energy giant Chevron’s shares. As a leading firm engaged in every aspect of the oil and natural gas industries, Chevron topped the list of the eight investor-owned corporations, followed closely by Exxon, BP and Shell. Together these four global businesses have been behind more than a shocking 10% of the world’s carbon emissions since 1965 (Taylor and Watts). Despite the evidence demonstrating how badly Chevron exploits earth’s resources, Buffett still shows long-term support for the company, both personally and from an investor’s viewpoint. “Believe me, Chevron is not an evil company,” he remarked in an interview. “I have no compunction — in the least — about owning Chevron. And if we owned the entire business, I would not feel uncomfortable about being in that [industry].”
2. Dominion Energy
In 2020, Berkshire Hathaway purchased Dominion Energy’s gas transmission assets, adding 7,700 miles worth of gas pipelines, gas storage facilities, and part ownership of a liquid natural gas export facility to its existing midstream fossil fuel portfolio (Kasper). Consequentially, Berkshire is now responsible for another estimated 1,663,568 metric tons of carbon dioxide equivalent (CO2e) – an increase of about 40% over its previous total. Comprising carbon dioxide and other greenhouse gases, CO2e expresses each gas’s impact on climate change in comparable terms (Brander and Davis). By investing in Dominion Energy’s assets, Buffett contributes towards accelerating the climate change process. Yet his response to this action in a press release was simply “We are very proud to be adding such a great portfolio of natural gas assets to our already strong energy business”.
3. Occidental Petroleum Corp
In 2019, Berkshire Hathaway made a $10 billion investment in the preferred shares of Occidental Petroleum Corp, an oil and gas exploration and midstream company. Again, Buffett’s hefty investments in this sector only served to exacerbate the negative externalities from capitalising on the earth’s non-renewable resources. On this occasion, Buffett expressed regret for his investment decision. However, this was only in light of monetary losses incurred instead of ethics-based considerations. Due to the COVID-19 pandemic in 2020, Occidental’s share price dropped by 64% in 2020. This caused Buffett to sell off his stocks held (Crowley and Chiglinsky) and even announce an intention to direct more funds into renewable energy. Regardless of his intentions, though, Buffett’s plan to steer towards wind and solar alternatives has not materialised. This leaves him in the same position in terms of accounting for climate change in investments.
Diversity & Inclusion
Warren Buffett is personally supportive of diversity and inclusion (Wolff-Mann). Yet, his investments lack this support.
Berkshire Hathaway ranked the bottom fourth on diversity among companies in the S&P 100 (Calvert Investments 2015). Buffett was defensive about his selection strategies, choosing to affirm his opposition to thinking purposefully and consciously about diversity (Duru). The double-negative statement might have come across as sounding convoluted, but his stand was clear. Berkshire Hathaway has its reasons for the way it hires the board and did not need to reconsider the status quo. While he gave reasonable criteria for hiring board directors – business savvy, shareholder-orientation and special interest in Berkshire – the criteria do not explain how the seemingly fair process could generate such poor marks for diversity. In a shareholder meeting, Buffett also seemed to misinterpret the meaning of the diversity question, that is to appreciate the potential improvement from an expanded search for talent. Instead, he focused on debunking the need for external consultants to staff a company’s board, which is unnecessary in the first place if the board already understands the benefits of diversity and inclusion.
In response to rejecting the recent disclosure proposal on diversity issues, Buffett’s board wrote: “Berkshire agrees that a diverse, equitable and inclusive workforce has been and will continue to be an important aspect of the success and long-term sustainability of companies.” Behind this seemingly impeccable stand, the reality is Berkshire Hathaway has a board with just 3 women, and only the first Black board member in 2020.
Case Studies
1. Apple Inc.
Apple is the single largest stock component of Berkshire Hathaway’s investment portfolio, making up 40% of its total, or $108,363,609,000. Buffett’s faith in Apple’s past and future success is astonishing – especially since he only bought the shares starting 2016, when Apple’s stock pricing was already high and many speculated an impending bursting of its price bubble. However, Buffett’s evaluation of Apple’s success did not consider its capacity for diversity and inclusion. Apple was criticised in 2016 of not being diverse enough in hiring practices, with transparency issues in diversity reports that did not provide raw numbers (Gaudiano and Hunt). While there are improvements in recent years, whereby employees from under-represented communities increased 64% since 2018 (Peterson), Apple still hires predominantly white male staff and progresses slowly on inclusion.
2. Amazon.com Inc.
Berkshire Hathaway holds $1,650,073,000 worth of Amazon shares. Just in 2021, Amazon has been subject to a series of scandals regarding racial discrimination and sexual harassment. The claims include discrimination and harassment as well as violations of the Equal Pay Act. In March, Amazon faced a lawsuit for its “systematic pattern of insurmountable discrimination”. The firm allegedly hires Black people for lower positions and promotes them at slower rates than their white colleagues (Adegeest). In May, another 5 current and former female employees separately sued Amazon for discriminating against Black and female workers in its corporate office hiring (Larson). The management team was further accused of retaliation after complaints were raised, allegedly firing an employee when she gave feedback about discriminatory racial epithets used by managers. Not only is Amazon lagging in embracing diversity and inclusion, but it is also tripping on the fundamentals of respect for employees of different backgrounds and identities.General motrs were under allegations of racial discrimination.
3. Wells Fargo
Despite recent large-scale sales of Berkshire Hathaway’s stake in Wells Fargo, Berkshire is still its major investor, holding $26,374,000 worth of the bank’s voting decisions. Wells Fargo followed Berkshire’s footsteps in opposing a proposal urging it to improve racial diversity policies for employees and assess the company’s impact on communities of colour (Gibson). Like Berkshire, Wells Fargo also declined public disclosure. This was on the grounds that a “human rights impact assessment” is already in the works. However, employees from minority groups reflected a lack of promotion opportunities. In response, CEO Charles Scharf attributed the imbalance in executives’ races to the firm having a “very limited pool of Black talent to recruit from” in 2020. While he later apologised for his words, employees reflected that no concrete changes ensued. Concerns over the firm only giving empty promises in improving diversity and inclusion have not subsided.
Closing Remarks
Climate change and diversity issues are increasingly important not only from an ethical viewpoint. They are also in fact aligned with an investment philosophy of long-term value-creation. While Warren Buffett is indubitably a successful investor and philanthropist who has made tremendous donations and contributions to society, there are further steps he can take when it comes to investment ethics. It is time he recognises that support for climate change and diversity issues should not be divorced from investment decisions. They can co-exist, and even serve to enhance portfolio performance. The increased support for the disclosure proposals from his shareholders is a strong message sent for him to re-assess the basis of his investments. Hopefully, he will receive it soon enough and invest with ethics in mind to benefit both his shareholders and the wider society.
References
Abbott, Mara. “Berkshire Hathaway management ignores systemic risks posed by climate crisis in voting against proposal seeking disclosures”. Ceres, 2021, https://www.ceres.org/news-center/press-releases/berkshire-hathaway-management-ignores-systemic-risks-posed-climate. Accessed 25 July 2021.
Adegeest, Don-Alvin. “Amazon sued for racial discrimination”. Fashion United, 2021, https://fashionunited.uk/news/business/amazon-sued-for-racial-discrimination/2021030454156. Accessed 25 July 2021.
Almeida, Teresa, and Grace Lordan. “Moving from cheap talk to action: the case of diversity and inclusion.” LSE Business Review (2020).
Brander, Matthew, and Gary Davis. “Greenhouse gases, CO2, CO2e, and carbon: what do all these terms mean?”Ecometrica, 2012.
Crowley, Kevin and and Katherine Chiglinsky. “Buffett’s Bershire sells common stock in Occidental Petroleum”. Bloomberg, 2020, https://www.bloomberg.com/news/articles/2020-08-14/buffett-s-berkshire-sells-common-stock-in-occidental-petroleum. Accessed 25 July 2021.
Duru. “Warren Buffett is tone deaf on diversity”. Dr. Duru, 2016, https://drduru.com/onetwentytwo/2016/05/01/warren-buffett-is-tone-deaf-on-diversity/. Accessed 25 July 2021.
Eccles, Robert G. “A piece of climate change advice for Warren Buffett: Change your vote!” Forbes, 2021, https://www.forbes.com/sites/bobeccles/2021/03/22/a-piece-of-climate-change-advice-for-warren-buffett-change-your-vote/?sh=3ff6dfc0765f. Accessed 25 July 2021.
Eccles, Robert G. “The times they are a-changin’ for Berkshire Hathaway”. Forbes, 2021, https://www.forbes.com/sites/bobeccles/2021/05/05/the-times-they-are-a-changin-for-berkshire-hathaway/?sh=790205c47907. Accessed 25 July 2021.
Faudiiano, Paolo and Ellen Hunt. “Apple’s diversity report reveals problems, risks and opportunities facing all corporations”. Forbes, 2016, https://www.google.com/amp/s/www.forbes.com/sites/gaudianohunt/2016/08/08/apples-diversity-report-reveals-risks-and-opportunities/amp/. Accessed 25 July 2021.
Gibson, Kate. “From Berkshire Hathaway to Silicon Valley, little to show for diversity pledges, critics say”. CBS News, 2021, https://www.cbsnews.com/news/wells-fargo-resists-diversity-audit-as-wall-street-silicon-valley-fall-short/. Accessed 25 July 2021.
Hagstrom, Robert G. The Warren Buffett Way. Wiley, 2014.
Holvino, Evangelina, Bernardo M. Ferdman, and Deborah Merrill-Sands. “Creating and sustaining diversity and inclusion in organizations: Strategies and approaches.” Blackwell Publishing (2004).
Jacimovic, Darko. “The Importance of Diversity in the Workplace – 20 Key Statistics”. Whattobecome, 2021, https://whattobecome.com/blog/diversity-in-the-workplace-statistics/. Accessed 1 August 2021.
Kasper, Matt. “Warren Buffett’s Methane Emissions Purchase From Dominion Energy”. The Energy and Policy Institute, 2020, https://www.energyandpolicy.org/warren-buffett-global-warming-dominion-energy-purchase/. Accessed 25 July 2021.
Larson, Erik. “Amazon sued for alleged race, gender bias in corporate hires”. Bloomberg, 2021, https://www.bloomberg.com/news/articles/2021-03-01/amazon-is-sued-for-alleged-racial-and-gender-discrimination. Accessed 25 July 2021.
Nawrat, Allie. “Diversity and sustainability: Is Warren Buffet behind the times?” Unleash, 2021, https://www.unleashgroup.io/2021/04/30/warren-buffett-diversity-sustainability-berkshire-hathaway/. Accessed 25 July 2021.
Peterson, Mike. “Apple hiring data shows increasingly diverse workforce”. Appleinsider, 2021, https://appleinsider.com/articles/21/03/18/apple-hiring-data-shows-increasingly-diverse-workforce. Accessed 25 July 2021.
Rhodes, John. “Berkshire Hathaway versus the S&P 500 through the years”. Seeking Alpha, 2021,https://www.seekingalpha.com/article/4423498-berkshire-hathaway-versus-s-and-p-500-through-years. Accessed 1 August 2021.
Riding, Siobhan. “Majority of ESG funds outperform wider market over 10 years”. Ft.Com, 2020, https://www.ft.com/content/733ee6ff-446e-4f8b-86b2-19ef42da3824. Accessed 25 July 2021.
Rosenbaum, Eric. “Here’s what Warren Buffett thinks about climate change”. CNBC, 2019, https://www.cnbc.com/2019/03/25/heres-what-warren-buffett-thinks-about-climate-change-and-investing.html. Accessed 25 July 2021.
Taylor, Matthew and Jonathan Watts. “Revealed: the 20 firms behind a third of all carbon emissions”. The Guardian, 2019, https://www.theguardian.com/environment/2019/oct/09/revealed-20-firms-third-carbon-emissionsAccessed 25 July 2021.
Wolff-Mann, Ethan. “Buffett rejects diversity measure for Berkshire, but throws support behind its goal”. Yahoo Finance, 2020, https://uk.news.yahoo.com/buffett-rejects-diversity-measure-but-throws-support-behind-its-goal-001730183.html. Accessed 25 July 2021.