Buffett Gives Successor Abel Rare Page Space for Sustainability

(Bloomberg) -- Warren Buffett built a rare excerpt into his much-awaited annual letter: A note from Greg Abel, his successor-in-chief at Berkshire Hathaway Inc.

Abel, who was publicly identified as the successor to America's most renowned investor for the first time last year, was tasked in Berkshire's annual report Saturday with giving a breakdown of the firm's sustainability endeavors -- a sign of the topic's rising importance to the conglomerate and its shareholders.

Buffett, who has faced mounting pressure on environmental issues over the years, typically navigates the topic by referring back to Berkshire's operating model, where each company has individual responsibility for how it addresses such risks. Abel's letter marks one of the most comprehensive explanations of the firm's environmental strategy in a Berkshire annual report yet, while also cementing his ascent to the top job as and when Buffett steps down.

“It has a tremendous signaling effect,” said Jim Shanahan, an analyst at Edward Jones. “It's perhaps the first sign of a true transition at the helm here. He has tasked his successor with specifically commenting on their efforts -- particularly as it relates to environmental issues and sustainability -- I think it's a powerful statement.”

Abel, who rose to prominence at Berkshire as a key manager of the energy operations and now oversees all of the non-insurance businesses which include more than 320,000 employees, outlined how a variety of businesses -- namely the BNSF railroad and energy operations -- are handling emissions goals and environmental efforts. BNSF and Berkshire Hathaway Energy represent more than 90% of Berkshire's direct emissions, he wrote.

“Berkshire's businesses are exceptionally well positioned to deliver on ever-changing customer expectations regarding sustainability, in both resources and attitude, while also driving value for Berkshire's shareholders,” the Berkshire vice chairman said. “I am supportive of these outlined objectives and fully committed to Berkshire's ongoing journey of delivering sustainable solutions.”

Abel also signaled that Berkshire would continue Buffett's decentralized approach to the environment under his own rein. Managers of its units will continue to own all business decisions including their approach to sustainability, he wrote.

Among the sustainability goals Abel outlined: BHE will retire 16 coal units between 2022 and 2030, in addition to the 16 units it's already retired -- a step that will help it cut greenhouse gas emissions in half by 2030. As the company deploys more non-carbon generation instead, BHE plans to retire all remaining coal units by 2049, with its fleet of natural gas units phased out by 2050. This will allow the business to achieve net zero greenhouse-gas emissions overall, Abel said.

For BNSF, Abel said the company will continue its improvements in fuel efficiency and increase its use of renewable diesel fuel, as it targets a 30% reduction in its GHG emissions by 2030.

“Other subsidiaries, of course, are important, but Berkshire will have failed if BHE and BNSF do not achieve their GHG emissions reduction goals,” Abel wrote.

Abel also touted the energy business's investment in renewable energy. It recently proposed a $3.9 billion wind and solar project in Iowa that could rank among the renewable energy industry's biggest yet.

Buffett similarly touched on sustainability in his annual letter. BNSF -- which he called the number one artery of American commerce -- is a cleaner alternative to truck haulage, he said. The billionaire investor also teed up Abel's letter by noting that the energy business had no wind or solar generation in 2000, but now is a huge player in that space.

“The profile you will find there is not in any way one of those currently-fashionable green-washing stories,” Buffett said of Abel's letter. On Berkshire Hathaway Energy's website, “you will see that the company has long been making climate-conscious moves that soak up all of its earnings.”

BNSF, as well as Berkshire's utility operations, helped the conglomerate's quarterly operating profit climb to $7.29 billion, the second highest level in data going back to 2010. The company's cash pile ended the year at $146.7 billion, as decent deals remained scarce, prompting Buffett to lean on buybacks to deploy the hoard.

Governance issues

On some other key social and governance issues, Buffett remained quiet, including the changing make-up of Berkshire's board which sped-up following the announcement that long-serving member Tom Murphy would step down. Buffett didn't mention whether or not his spot would be filled.

Despite giving Abel space to pen his own letter, Buffett made little mention of his role succeeding the billionaire investor as Berkshire's chief executive officer. But nonetheless, it was a chance to get some insight into the executive, said James Armstrong, who manages assets including Berkshire shares as president of Henry H. Armstrong Associates.

“It makes all the sense in the world to give shareholders the chance to hear from Greg,” he said.