Australia’s super funds can’t simply screen out or diversify away from climate-change risk by moving out of assets such as coal or gas and reaping the rewards from companies that are able to exploit energy transition opportunities.

That is the view of Claire Heeps, an environmental, social and governance (ESG) analyst at AustralianSuper who will speak at Investment Magazine’s Infrastructure and Real Estate Conference, to be held in Melbourne on February 19-20.

ESG screens are blunt instruments and won’t provide the necessary protection from losses, Heeps argues, especially when it comes to real assets, which involve higher physical risks.

Funds should be invested in companies that disclose forward-looking climate targets or have forged strategies under different climate-related scenarios, she says. If, instead, they simply screen out the gas sector, for instance, they could miss out on potentially good returns.

“As trustees, it’s hard to label companies as ‘ethical’ or ‘unethical’, you have to look at a company holistically and examine how they think their business can operate in various climate scenarios, together with consideration of your fiduciary responsibilities,” Heeps adds.

Fund members can get confused about climate change risk, she explains. Many will say they want to screen out unethical assets, even though surveys show that returns remain their top priority.

AustralianSuper is one of many investors that use the latest framework provided by the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD). This is designed to get companies and asset owners thinking about how they’re positioning their strategies for the future.

“The TCFD framework has created more rigor and comparability on how companies disclose climate change risk,” Heeps notes. “But it also insists on disclosure, so we have a way of evaluating physical and transition risk and opportunities across various businesses.”

Her comments underscore the message of the latest TCFD report, which was released last September and essentially argues that companies or asset owners that meet investor need for information on how they are preparing for a lower-carbon economy will have a competitive advantage.

Fundamentally, if more capital flows to those companies that build resilience to climate risk, it means investors are taking the TCFD methodology seriously.

Still, Heeps explains that making more informed investment decisions about how various companies or asset owners deal with climate-change risk remains difficult, since they all have different views on how they are placed to create value.

“Crucially, as a long-term investor, we want to invest in companies that are aligned with our view of the world,” Heeps says. “We want to know how they think about different climate change scenario models – what they’re banking on, basically.”

Understandably, there are some companies and asset owners at the forefront that are open about difficulties and challenges ahead. “Others are not engaged but that is a huge investment insight for us,” Heeps says.

At the Infrastructure and Real Estate Conference, Heeps will be participating in a panel discussion on the complexities of direct investment. As she sees it, although the industry understands the potential for higher net returns with direct investment, it doesn’t understand some of the complexities of direct investment, since they are not discussed at industry forums.

She reckons the trade-off between complexity of resourcing and the opportunity for better returns is complicated, because direct investment requires building up in-house teams with deeper and more diverse skills. This is doubly true if investors plan to appoint staff to company boards.

Heeps thinks it’s worth it: “Deeper in-house skills and experience contribute to more robust investment decisions; one gets insights from managing assets over time.”

Moreover, to her, weighing up the pros and cons of appointing staff, rather than experts, to boards is a real headache.

“On the one hand, a staff member will align with you and advocate your interests, as they understand the business case from your perspective and can show leadership in driving outcomes.”

The staff member must be appropriately skilled, however, so as to add value to the board.

“So, there is a tension between alignment and skill set with a limited in-house talent pool.”

Developing internal investment professionals to be board members makes talent management more complex. “Clearly, from a governance perspective, increasing staff work load has implications for their internal roles,” she says.

Elizabeth Fry has been a financial journalist for more than 25 years and has written for a number of publications, including CFO, The Financial Times and The Australian Financial Review.