No matter how rich, famous, accomplished, and well-respected a person is, we can all use some friendly advice from time-to-time. It is in that spirit that I would like to offer some to the legendary Warren Buffett, Chair and CEO of Berkshire Hathaway, Inc.
Here’s the advice for the upcoming Berkshire Hathaway annual meeting: Please change your mind and vote in favor of the shareholder proposal submitted by the California Public Employees Retirement System (CalPERS), Federated Hermes, and Caisse de dépôt et placement du Québec (CDPQ) which requests “that the board of the Company publish an annual assessment addressing how the Company manages physical and transitional climate-related risks and opportunities, commencing prior to its 2022 annual shareholders’ meeting.”
This seems like a very modest ask, particularly in light of how companies all over the world are publishing data relevant to climate change, such as using the framework of the Task Force on Climate-related Financial Disclosures (TCFD) and including metrics on greenhouse gas emissions and commitments to be net zero by 2050. Since you own around one quarter of the company’s voting shares, this would be a strong and powerful signal that Berkshire Hathaway recognizes the potential impact of climate change on the company. Failure to do so suggests that you do not, an unfortunate mark on your legacy.
Mr. Buffett is getting lonelier by the day on the wrong side of history. Over 1,400 companies, which include many in the U.S., support the TCFD recommendations. Climate Action 100+ (an investor coalition of 575 members with $54 trillion in assets under management) reports that TCFD is supported by 59 of the 167 companies it identified as the world’s largest greenhouse gas emitting companies. To illustrate the emissions footprint of this group, when ranked against whole nations the top 100 of these companies rank third after the U.S. and China for emissions and represent around 80 percent of global industrial emissions. Oh, and Berkshire Hathaway is an illustrious member of this dubious Club of 100.
While the world of annual meetings, shareholder proposals, and proxy voting is a complex and arcane one, the issue here is actually very simple. In Berkshire Hathaway’s 2021 Proxy Statement in advance of its annual meeting of shareholders, the board has made a unanimous recommendation that shareholders vote against this proposal. Their argument is that since it “manages its operating businesses on an unusually decentralized basis” with “few centralized or integrated functions” it is unable to do such an annual climate-related assessment. Resources certainly aren’t the issue here. Page K-57 of Berkshire Hathaway’s 2020 annual report states that, “At December 31, 2020, our insurance and other businesses held cash, cash equivalents and U.S. Treasury Bills of $135.0 billion.”
The company further argues that it is unnecessary for it to publish such a climate-related assessment since the “Board regularly receives reports on the major risks and opportunities of the operating companies, including those related to climate.” Berkshire Hathaway owns all or a substantial portion of 63 subsidiary companies. I’m thinking, “Hmmm. How many people does it take to adequately monitor all these reports? If only a few are doing so, the oversight can’t be much. If it’s a fair number, just add a few more folks to collate the information and publish it.” Either way, the company’s argument makes no sense.
Of course, the company might say, “Looky here! Shareholders who really care about climate can read the sustainability reports of our companies.” Too bad that only 15 of the 63 are shown on the Berkshire Hathaway website, most of which are glossy but pretty thin gruel, and none are published for the parent company.
Come on, Mr. Buffett, let’s get serious. Shareholders own shares in Berkshire Hathaway as a whole, not in the individual operating companies and so shareholders have no idea how climate risk is or is not being managed by the company as a whole. Are they supposed to just take the parent company’s word for it that their house is in order when it comes to climate change? Imagine a world without mandated financial reporting based on standards and a company said, “Gee, we have a lot of business units and it’s kinda hard to add up all the revenues and costs to get to profits. But no worries—and trust us—we’re on top of things and we had a very good year indeed!” Huh?
Climate-related disclosures are now as important as financial disclosures and the two are obviously related. Berkshire Hathaway’s “Ah shucks, we’re very decentralized so can’t and won’t do what you’re asking for. Sorry about the fact that all of you shareholders can only own shares in the whole company” position is untenable, even insulting.
CalPERS, Federated Hermes, and CDPQ are taking a constructive and respectful approach to the company. In a March 10, 2021 letter to Mr. Buffet, Mr. Timothy Youmans, Lead-North America of EOS at Federated Hermes, suggests that “prior to the annual meeting, it would be beneficial to discuss with you, or the appropriate board member representative, the specifics of the resolution and what we as institutional investors expect to see in future reporting cycles.” In response, Mr. Youmans received an e-mail from Mr. Marc D. Hamburg, Senior Vice President, telling him that Mr. Buffet “has no interest in discussing the proposal with you” and says that “he does hope that you will be able to present your shareholder proposal” at the upcoming shareholder meeting. Mr. Youmans responded to this in a letter of March 12 in which he thanks Mr. Hamburg for providing his letter to Mr. Buffet, expresses his disappointment “that we will not have the parent company – shareholder engagement dialog about the board’s draft opposition statement prior to the annual meeting,” and says he looks forward to attending the annual meeting and formally presenting the proposal in person in Los Angeles.
I find these proxy protocols entertaining but somewhat beside the point. There is nothing special about Berkshire Hathaway that makes it immune to the risks and opportunities of climate change—as a corporate entity. It also only issues shares as a single corporate entity and only reports its financial statements as a corporate entity. But do these financial statements reflect the potential impact of climate change? In order to know this, we would need to see language addressing this in the auditor’s annual report to shareholders. As I have recently written about, this could be done, at least somewhat, through a “Critical Audit Matter” disclosure.
Deloitte is the company’s outside auditor. In its WorldClimate initiative Deloitte notes that “Climate change is not a choice. It’s billions of them.” Very well said. And one of those choices is whether to take climate change into account when preparing the accounts. The company is ultimately responsible for its financial statements, how it is managing climate risk, and how that is reflected in its financial statements. I’m not suggesting the company pass the buck to Deloitte. But Deloitte cannot pass the buck either. The role of the auditor is to provide assurance on the financial information used by investors to make decisions.
Towards that end, the sponsors of the shareholder proposal have contacted Deloitte’s Ms. Wendy Fletcher, who is listed at the Public Company Accounting Oversight Board (PCAOB) as the lead audit partner on the Berkshire Hathaway account. Shareholders could gain some comfort if Ms. Fletcher and her firm could give them assurance that the company’s financial statements appropriately reflect the implications of climate change. The financial statement for 2020 is in the books but we are early into 2021, so there is plenty of time for Deloitte to do whatever is necessary for this year’s audit.
And we know Deloitte has the required discipline and capabilities to do this. For example, it audits BP and signed off on a massive $17.5 billion climate-related write-down last year. Deloitte audits a number of the Climate Action 100+ companies and so is in a strong position to show audit leadership on incorporating climate change into the financial audit. Berkshire Hathaway provides Deloitte with a showcase opportunity to send a strong message to the market.
I don’t have a crystal ball, so I have no idea what is going to happen at Berkshire Hathaway’s May 1, 2021 annual shareholder meeting. I also don’t think the future is preordained. It can be changed. And Mr. Buffet can change it by encouraging his board of directors to reconsider their position. As a shareholder he could say, “With all due respect to my board, after some careful reflection I have decided to vote my 25 percent voting share in favor of the climate-related assessment resolution. Furthermore, I challenge other shareholders to at least match me so we can get more than a 50 percent vote in support of this shareholder proposal.” This would be good for Mr. Buffet, for Berkshire Hathaway and its shareholders, for the capital markets in general, for the world today, and for the future generations of tomorrow.
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