March 10, 2014
One of the most widely read annual reports is the Berkshire Hathaway report, and the recent release of the 2013 annual should not disappoint readers.
And, to those of us in the clean tech infrastructure sector, we find the report noteworthy because it points out Warren Buffett’s strong interest in renewables at this point in the cycle. Let’s not forget—he was the investor buying bank stocks and industrial companies in 2008-2009 when few investors had the same level of confidence.
There are several key highlights in the report. The first involves Berkshire Hathaway’s energy subsidiary, MidAmerican, whose recent acquisitions included NV Energy that supplies power to Nevada. Buffett states, “This acquisition fits nicely into our existing electric-utility operation and offers many possibilities for large investments in renewable energy.” He states that MidAmerican is, “one of our ‘Powerhouse Five’” non-insurance businesses. MidAmerican serves customers in eleven states and “from a standing start nine years ago, MidAmerican now accounts for 7% of the country’s wind generation capacity, with more on the way. Our share in solar – most of which is in construction – is even larger. When our current projects are completed, MidAmerican’s renewables portfolio will have cost $15 Billion. We relish making such commitments as long as they promise reasonable returns.”
What does Buffett consider that others do not recognize? The Berkshire portfolio is packed with stocks of mainly U.S. companies that are global leaders with great management teams: Coke, American Express, IBM, and Wells Fargo just to mention a few. At the same time, Berkshire enjoys a float of $71 Billion of insurance premia that it invests in a wide range of companies. From a portfolio objective, he is looking to invest in businesses that provide stable and predictable cash flows and hopefully growing customer bases. As a conservative insurance company that does not like surprises, the investment portfolio is generally well stocked with bonds. However, Buffett wants assets with stable cash flows that can outperform bonds by a wide margin. He also invests in assets that have high, consistent growth levels. Owning a portfolio of real assets of businesses reduces the risk of owning bonds.
Why do we care about this? As one of the most respected investors in recent memory, we are pleased to see that Berkshire’s investment objectives recognize the growing value of renewables.
What are other insurers doing? Many other large insurance companies are adjusting their business models to adapt to the impact of climate change and are evaluating different strategies to diversify the portfolios. The Organization for Economic Cooperation and Development (OECD) estimates that insurance companies have total assets of $25 Trillion and have invested only $22 Billion in clean energy. Berkshire’s year end 2013 assets were $484 Billion which trails MetLife’s $885 Billion, Prudential’s $731 Billion, and AIG’s $541 Billion. Hartford Financial’s $277 Billion follows closely behind. However, insurance companies are making progress.
- MetLife has an ownership stake in the largest active solar plant in Texas.
- Allianz has 42 wind farms in Germany, Italy, France and Sweden, and is evaluating offshore wind projects in the UK and Germany.
- Zurich Insurance plans to invest $1 Billion in green bonds that reduce the impact of climate change.
- SwissRe looks to mitigate risk by investing in new solar parks and wind farms.
- Prudential Insurance has invested $500 Million in wind power in California, Colorado, Kansas, and Minnesota along with green building efficiency in its vast inventory of commercial property holdings.
According to a 2012 Mortgage Bankers Association (MBA) survey, the life insurance industry owns 13% of the $2.4 Trillion outstanding commercial mortgage loans; this can provide a growing impetus to improve building efficiency and provide new sources of clean energy to enhance and build values. In general, most insurance companies are looking at the same data that Berkshire Hathaway is but are taking a different approach. Cutting edge insurance risk managers are looking to earn stable returns while reducing the risk to climate change and market volatility by investing in clean projects that provide long term, sustainable solutions. The investment shift is one of the continuing signs of greater participation by the corporate sector. Investing in energy, water, or efficiency infrastructure is no longer business as usual. For many companies, it’s the new way of doing business.
There has been a large rebound of infrastructure sector stocks since the dramatic 2012 decline, followed by the continued upswing into 2014. Investors have been looking for resiliency in clean tech and renewables along with support from commercial users into a wide range of products, projects, and other goods and services in this sector. What better validation than Berkshire Hathaway and the U.S. and Europe’s largest insurance companies?
As many industry groups have projected, the amount of funding that is required in the next two decades ranges from $25 to $50 Trillion depending upon the conclusion of the research group or NGO. The good news is that corporate awareness and action is growing and more funds will be flowing into this sector. Google is another great example. According to Bloomberg, Google has funded over $1.4 Billion in clean power since 2010 and half of the projects have been solar. Excluding utilities and financial institutions, Google is at the top of the list. And, let’s not forget Facebook. Facebook is developing a wind farm in Iowa and hopes to generate 35% of its power from renewables within 2 years.
Berkshire Hathaway, Google, Facebook, Met Life, Prudential, and many others—what do they have in common? A lot, but particularly, it seems that affordable, clean renewable power and energy efficiency are the common thread. The number of players in clean tech is growing rapidly, and the list contains well known and well respected companies. What do they know? Why are they doing it.
Part of the qualitative analysis of buying, holding, or selling a stock is to identify intangibles such as insider activity and strength of management team. Of course, the “why” is not always easy to identify, but the “what” action is.
To me, the “what” explanation is simple. It makes economic sense; it makes environmental sense; the timing is right. The public is increasingly demanding change. And, government policy supports it—around the globe as well. We need more Berkshires, Googles, and other early adopters. I won’t question the why, but I know they represent some of the most profitable business models in the world.