Wildfires make utilities a tricky investment. Just ask Warren Buffett.

Warren Buffett made a fortune by investing in electric utilities in the western U.S. Now, the world’s best-known investor says wildfires might undermine that strategy.

PacifiCorp, a utility company owned by Buffett’s Berkshire Hathaway, has incurred hundreds of millions of dollars in liability costs tied to a series of Oregon wildfires in 2020 and might owe hundreds of millions more. In his most recent annual letter, Buffett told shareholders that he might rethink utility investments in states at high risk of wildfire.

“We will not knowingly throw good money after bad,” he wrote in his February letter.

Buffett’s salvo reflects a growing reluctance among investors to own utilities in the West and elsewhere as drought and climate change heighten the risk of deadly and destructive wildfires. Utility companies in California first grappled with significant liability costs tied to fires ignited by their equipment in recent years. Now utilities in Oregon, Hawaii, Colorado and Texas are facing similar prospects.

Buffett’s letter prompted pushback from utility executives across the West who have been striving to retain investor confidence as they propose multibillion-dollar investments to make their systems safer and more resilient. They say two things are necessary to manage the risk: access to the capital needed to make improvements, and legislation or regulation to limit potential liability costs.

The prospect of utility companies losing favor on Wall Street could jeopardize their ability to complete the work needed to make their systems safer. It could also make that work more expensive to complete, resulting in higher costs for customers.

“This is a systemic risk, not just for the utility industry, but a systemic risk for the whole economy,” said Pedro Pizarro, chief executive of Edison International, which operates Southern California Edison. “There’s going to be a call on capital.”

PG&E, a utility company serving most of Northern and Central California, was the first major U.S. utility to incur crippling liability costs tied to a series of wildfires in 2017 and 2018 that collectively killed more than 100 people and destroyed thousands of homes. The company sought bankruptcy protection in 2019 and emerged the following year after settling fire-related claims for $25.5 billion.

In a move to prevent more utility bankruptcies in California, state lawmakers passed a bill in 2019 that established a wildfire fund to help the companies manage financial risk and limit shareholder losses. Utilities can tap the fund to help cover damages exceeding $1 billion.

PG&E Chief Executive Patti Poppe said she thinks Buffett’s concerns shouldn’t apply to utilities in California because of that legislation, as well as measures that each of the state’s utilities have taken to reduce wildfire risk. The wildfire fund, combined with PG&E’s self-insurance program, significantly limits the losses shareholders could face in the event of another fire, she said.

“That’s a commitment that California has made that our investor-owned utilities should be investible,” she said. “There was a period of time when we weren’t, but that time has passed.”

Still, investors say they might eventually require higher returns in exchange for taking on wildfire risk, potentially limiting the number of firms willing to do so.

Mary Titler, a senior investment analyst who has covered utilities for the asset-management firm Columbia Threadneedle Investments for more than 20 years, said she has started asking a range of questions in assessing investment risk, such as whether a utility has plans in place to proactively shut off power when windy conditions increase the chance of wildfire. The challenge for investors, she said, is determining the amount of damages a utility might owe if its lines play a role in ignition.

“Just like other industries, you can quantify the risk to some extent, but…the range can be so big,” she said. “There needs to be updated liability standards in states with this risk to shift the burden away from utilities.”

Oregon’s Labor Day fires in 2020 burned over 1.2 million acres, destroyed more than 5,000 homes and businesses, and killed nine people. Fire and public-safety officials believe PacifiCorp’s power lines played a role in several of the fires, though most state investigations are pending. The company denies negligence.

The company is embroiled in litigation expected to take years to resolve. Juries in Oregon have reached several verdicts awarding tens of millions of dollars to people who lost property and otherwise suffered as a result of the fires.

Berkshire Hathaway Energy, which owns PacifiCorp, said it talks to investors about its efforts to reduce the risk of its equipment sparking wildfires.

“For utilities, there is a growing risk in making future investments in regions where they become the insurers of last resort in a more frequent extreme weather environment,” it said.

Todd Logan, a partner at Edelson, a law firm suing PacifiCorp on behalf of a number of fire victims, said he sees the threat of substantial liability costs as key in prompting utilities to do more to make their systems safe and manage fire risk.

“We see sort of one big tragic event in each utility service territory before they start making changes,” he said. “I think it necessarily relies on us doing our job to go get big verdicts to show them that juries care about this stuff.”

In Utah, where PacifiCorp also operates, lawmakers passed a bill last month that allows utilities to establish wildfire funds to help manage liability risk and caps the value of certain fire-related claims.

Stephanie Link, chief investment strategist at Hightower Advisors, a wealth-management firm, said she would be unlikely to invest in a utility operating in a state without any sort of cap on the amount of damages the company could have to pay.

“There is unlimited liability, potentially,” she said. “It’s also the time frame. We have no idea if there’s going to be a resolution anytime soon, and so that’s going to be the overhang on the stock.”

Write to Katherine Blunt at katherine.blunt@wsj.com