Bolstering Australia’s global position in the international move towards net zero has become a priority for the government, which committed $22.7 billion in its 2024–25 budget last month for the Future Made in Australia (FMIA) initiative.
FMIA, according to the government, seeks to mobilise the support of institutional investors, including super funds, towards investment in clean energy, innovation, and technology projects to “secure Australia’s place in a changing global economic and strategic landscape”.
Speaking to InvestorDaily on the sidelines of an event on Tuesday, Assistant Treasurer Stephen Jones said interest from institutional investors in FMIA is significant.
“There’s been lots of interest from institutional investors in investing in energy projects, transmission projects, and infrastructure projects,” he said.
However, industry bodies like the Australian Sustainable Finance Institute (ASFI) have argued that despite the FMIA, the annual superannuation performance test is “significantly” constraining the ability of institutional investors like super funds to adopt sustainable finance investment strategies at scale.
“[The test] may limit super funds’ ability to invest in accordance with member preferences, and potentially to invest in accordance with members’ best financial interests over the long term,” ASFI explained in its submission to government, noting this is “suboptimal” for members.
“Increasingly, there may also be a tension between satisfying the current YFYS performance test and complying with the emerging sustainable finance policy framework which encourages super funds to develop and disclose climate transition plans, and government recognition of the importance of private capital to support Australia’s climate transition.”
Similarly, $80 billion fund Rest also referred to the test as “not sector-neutral”. It elaborated that investments in emerging asset classes, like the energy transition, can be disincentivised through their lack of representation in traditional indices.
Earlier this year, the government announced a review of the design options for the annual performance test, noting evidence has shown that the test may actually be influencing investment decisions to the detriment of member outcomes.
At the time, Treasurer Jim Chalmers explained that, while the test is driving good outcomes and has helped lift the performance of super funds, industry has raised concerns the current test is “holding back investment in some sectors that could provide strong returns for members, such as the energy transition and affordable housing”.
He elaborated that the test benchmarks were “never meant to serve as a prescription on how to invest”, although that has become the view of a number of industry stakeholders.
Adding to this on Tuesday, Jones reiterated the government is not attempting to influence how super funds invest.
“The one thing we won’t change is the obligation for trustees to invest their members’ money in the best financial interest, so if the project doesn’t stack up on a commercial basis to get a great rate of return, nothing we are going to do is going to change that,” he said.
“But, if what we have in place at the moment is getting some perverse outcomes, which are discouraging funds from investing in things that have a good economic benefit and a good return for their members, then we should look at that and we will.”
Previously, UniSuper’s chief investment officer, John Pearce, highlighted the additional considerations superannuation funds take into account when investing members’ retirement savings in the transition.
Speaking at an investment conference in April, Pearce said: “We’ve got to come back to our primary fiduciary responsibility and that’s not just members’ best interest, it’s members’ best financial interest. It’s very, very explicit, so that’s the first box you have to tick.”
UniSuper prioritises this fiduciary duty in its investment decisions, Pearce elaborated, citing the fund’s 2022 co-investment alongside ISPT and HESTA to create a circa $600 million Health Translation Hub (HTH) project as an example of where this duty aligned with a social benefit.
“It ticked all the financial boxes and we’re also able to do good for society,” he said.
While highlighting the energy transition as a major concern for investors, with the government encouraging institutional participation, Pearce noted that ultimately, UniSuper needs to see the metrics and “they’ve got to work for us”.
In its sustainable finance roadmap published this week, the government has since announced it will consider stakeholder feedback on options to refine the annual superannuation performance test. The government pledged to “continue to work with financial regulators, governance experts and industry stakeholders to identify policy priorities for mainstreaming sustainability considerations in corporate governance and financial institution decision making.”
