At an investment presentation in 2021, Warren Buffett called ESG asinine. What did he mean by that, and was he right?
Warren Buffett once said his favourite time frame to hold is “forever.” As an investor, Buffett is famous for his long-term thinking. Maybe then there is some irony, because if thinking long term suggests ESG is an optimal business strategy, why is it that last year, Buffett described ESG as asinine?
“Berkshire is built on autonomy,” said Buffett; I am probably the only CEO of an S&P 500 company who doesn’t get a consolidated income statement every month. I don’t need it. I could get sixty or seventy companies to go to all the trouble, but it doesn’t make any difference.”
Yet, according to the ESG advocates we spoke to, ESG is all about long term thinking.
ESG is coming, they say. The pressures of climate change and other environmental issues have put sustainability into the public’s consciousness. Increasingly, customers demand that companies buy goods and services by applying the highest ethical standards.
The labour shortage has meant that companies need to make themselves more attractive to existing staff and future staff. Embracing ESG is one way of achieving this.
Hybrid and remote working has emphasised the importance of mental health. According to Damien Stork, by creating an environment conducive to supporting positive mental health creating positive feelings, staff retention and recruitment is aided.
Regulators are following the trend; governance is moving to ESG
These trends will continue creating an ever greater necessity for ESG, creating the opportunity of first-mover advantage.
So what was Mr Buffett thinking?
“I think, trying to put myself in his [Warren Buffett] side, … most of his organisations are extremely decentralised and what was proposed was that all of these companies produced ESG reports. So if you only focus on ticking the box and creating an ESG report, you are missing the point. It will probably be very costly and take a long of resources; I think that what he meant was ESG reporting.”
Cecilia Carlswärd, founding partner at Violet Hill & Co
Stuart Ravens, an ESG analyst, said: “In a way, I sympathise with him. There are different ways of analysing a company’s ESG performance.” He draws an analogy between ESG ratings and going on a blind date with someone and going on social media in advance to have a quick look at who it is you are meeting. “Are there any red flags out there?”
“At a basic level, that is what the ESG companies are doing — they are maturing, but at the lowest level, that is it,” using desk research.
“But what we are trying to analyse is internal to a company. A company is never going to shout about dumping chemicals into a stream or cutting people’s wages while the managing director takes a ten million pound bonus.” So by focusing on information in the public domain, you only get a partial picture. ”
Returning to the dating analogy, “it is like going to your friend who organised that blind date to ask more about that person. But you will never find out about that person unless they want to disclose some information. And this is what Warren Buffet is talking about.”
Martijn Eikelenboom, Managing Partner at management consulting firm Arthur D Little said that he understood Mr Buffett’s comments but added: “As he is clearly seen as a global business leader, I don’t think he should make this kind of statement.”
“If we want to change the world…he should respond in a more balanced way. Yes, there are problems with objective data and comparing performance objectively….and it is a lot of work. But, if we don’t succeed together, with creating standards and becoming transparent with what we want to do and what we want others in our supply chain to do, we will never reach any targets.”
Mr Eikelenboom added that while we need to acknowledge that ESG ratings and practices are not perfect, we need to “take the first step and try to create transparency together in certain ecosystems”.