Super funds’ activities in ESG, sustainability and carbon transition result in relatively high levels of tracking error under the Your Future, Your Super performance test, increasing the risk of funds failing the test.

The research addresses industry concerns the current design of the performance test makes it difficult for super funds to incorporate these activities into their investment portfolios, increasing the risk of a shortage of capital needed to fund Australia’s energy transition to net zero by 2050. It was conducted by The Conexus Institute, FTSE Russell, Australian Sustainable Finance Institute and the Responsible Investment Association Australasia.

“Trustees are faced with a difficult decision between living with a heightened likelihood of failing the YFYS performance test at some point or having to pare back the degree to which these activities are implemented,” Conexus Institute advisory board chair Fiona Reynolds said.

The research estimated the performance test tracking error in three types of portfolios – socially responsible investment portfolio, a Paris-aligned portfolio and a direct investment portfolio. This was then compared against a level of performance test tracking error that provides a stable environment for super funds.

The research was authored by David Bell of The Conexus Institute and Trista Rose of FTSE Russell.

Bell told Investment Magazine that socially responsible investment choice options offered by super funds face difficulties, and “some funds have lobbied to have these options carved out under the current review of the performance test”.

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