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Analysis: Buffett's ESG snub risks alienating Wall Street

[May 04, 2021] By Ross Kerber, Jessica DiNapoli and Jonathan Stempel

(Reuters) - Berkshire Hathaway Inc shareholders can accept Chairman Warren Buffett's hostility to bitcoin, blank-check acquisition firms and wild bets on trading app Robinhood. But when it comes to environmental, social and corporate governance (ESG) standards, many are drawing a line.

Buffett and his board opposed two shareholder resolutions at Berkshire Hathaway's annual shareholder meeting last week that called for annual reports on how its companies are responding to the challenge of climate change, as well as reports on diversity and inclusion in the workplace.

He prevailed, supported by directors who along with him control a combined 35% of Berkshire Hathaway's voting power. But some of his top investors, including BlackRock Inc, the world's biggest asset manager, were part of the roughly 25% of Berkshire Hathaway shareholders who defied him and voted for each resolution. The California Public Employees' Retirement System, the largest U.S. public pension fund, and Federated Hermes Inc, the $625 billion asset manager based in Pittsburgh, were among sponsors of the climate-change resolution.

It is a steadily growing trend. Environment-related proposals at Berkshire Hathaway's 2018 annual meeting drew no more than 12% support from shareholders, as did a resolution on diversity last year.

As more Wall Street funds manage assets with a mandate to consider ESG causes, some corporate governance experts say pressure on Buffett will increase in the coming years.

"Even an investor of Buffett's renown may not be immune to such larger market trends," said Ric Marshall, executive director for ESG Research at MSCI Inc.

Berkshire Hathaway and Buffett did not respond on Monday to requests for comment.

In opposing the shareholder proposals, Berkshire Hathaway's board argued that the Omaha, Nebraska-based company's decentralized business model made it unreasonable to have one-size-fits-all standards for its operating units on climate change and diversity.

Buffett, one of the world's biggest philanthropists, told investors during Saturday's shareholder meeting that requiring ESG reports from all the subsidiaries would be "asinine," because many of them are small and Berkshire Hathaway allows them to run independently.

He also said he does not like making "moral judgments" on businesses, and it is "very tough" to decide which ones benefit society.

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Warren Buffett, CEO of Berkshire Hathaway Inc, pauses while playing bridge as part of the company annual meeting weekend in Omaha, Nebraska U.S. May 6, 2018. REUTERS/Rick Wilking

Berkshire Hathaway is hardly alone. Other major companies, including Citigroup Inc and Amazon.com Inc, have resisted ESG shareholder proposals, calling them impractical or inferior to their own.

Whistle Stop Capital CEO Meredith Benton, a consultant to shareholder group As You Sow, which filed the Berkshire Hathaway diversity proposal, said Berkshire Hathaway stood out in demonstrating little initiative on the ESG front and Buffett showed a "lack of leadership."

"Even Buffett can't ignore what his investors are asking for," Benton said.

DISCLOSURES, NOT HOPE

In a note on its website, BlackRock criticized Berkshire Hathaway for not adequately showing how its business model would be "compatible with a low-carbon economy" and not disclosing information to help investors assess its diversity efforts.

Federated Hermes' Tim Youmans, one of the firm's engagement leaders, said Berkshire Hathaway Vice Chairman Greg Abel, who Buffett said this week would become chief executive if he were to step down, seemed more focused on climate change at the shareholder meeting than his boss.

Abel said at the shareholder meeting that all of Berkshire's coal-fired power plants would be shut by 2049 and that its utility businesses had already made a big transition to renewable energy.

Youmans said this gave him hope the company would be more responsive on ESG questions, but added, "We're looking for disclosures and targets as opposed to hope."

Shareholder proposals on environmental and social issues at S&P 1500 companies averaged 28% support in 2020, up from 20% in 2017, according to proxy solicitor Georgeson.

Activists hope to do even better in 2021 after the United States rejoined the Paris climate agreement and the Black Lives Matter movement drew wide support.

Dupont shareholders overwhelmingly backed proposals last week calling for the disclosure of workforce diversity data and a report on plastic pollution.

The 81% of votes cast for the latter was a U.S. record for an environmental proposal opposed by management, according to Heidi Welsh, executive director of the Sustainable Investments Institute.

(Reporting by Ross Kerber in Boston and Jessica DiNapoli and Jon Stempel in New York; Editing by Greg Roumeliotis and Leslie Adler)

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