Warren Buffett on Climate Change

In his 2015 Annual Shareholder Letter, Warren Buffett addressed climate change. As the owner of numerous different energy companies and insurance companies, it’s understandable that the Oracle of Omaha has been paying attention to the idea of climate change. However, the whole statement was brought about as Buffett acknowledged a proxy proposal regarding climate change at the annual meeting. The implication was that climate change might specifically effect Berkshire’s insurance division.

While Buffett made sure to acknowledge that the company’s energy businesses had made “major commitments to the future development of renewables in support of the Paris Climate Change Conference” earlier in the letter, in this portion, which spans eight paragraphs and nearly 600 words, he addresses climate change directly.

Here are some of the highlights from the letter:

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…. 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.

This paragraph really sums up Buffett’s personal beliefs about climate change, and also his opinions on what should be done about it. As he supported Hillary in the 2016 election, it’s no surprise that he agrees with the idea of climate change. This is the only non-business related statement about climate change in the article, as Buffett is clearly trying to stay focused on such a controversial subject.

He went on to talk about the proxy and explain to readers exactly why this is even something worth talking about where business is concerned.

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.

The article goes on to say that, in a nutshell, something like climate change may well cause issues for the customers who Berkshire insures, but those risks are usually off-set by higher premiums which, in turn, makes the company more money. It might sound harsh, but it’s also very practical, as we’ve come to expect from Buffett.

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.

There is a lot of research both backing up and refuting Buffett’s claims, but some people disagree that climate change will not effect the company, or indeed, make it grow. No matter how you look at it, this is something of a gamble and while Buffett is generally right, he isn’t always right. Regardless, in disasters many insurance companies either crumble or gain even more money, and Buffett seems fairly clear about which way he believes it will go.

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.

In short, from a business perspective, Buffett thinks that climate change is nothing to worry about. On a more personal level, he acknowledges that worry may be completely warranted, and he might even share in that worry himself. It just goes to show how many different sides there really are to the climate change debate.

 

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