The Future Fund, established in 2006, has two key objects: to strengthen Australia’s long-term financial position; and provide for “unfunded” super liabilities for public servants, to shore up the budget. The Fund was originally scheduled to start making payments to the government in 2020, but that is now slated for the 2033 financial year.
Nearly two decades since it was set up, there’s scant evidence that the government needs help from the Fund to meet public servant pension liabilities. That’s not to say that the Fund was unnecessary, is now redundant or that establishing it was misguided. It was not, but the Fund must be ready to evolve in a rapidly changing world. It has the potential to play a much more significant role in meeting our national goals, rather than just making money to pay public servant pensions. If that were all it could do, it’s harshest critics might be right that it should be liquidated.
It was therefore fitting that the government last month updated the Fund’s investment mandate after nearly 20 years to give it a new telos – the ancient Greek word for goal or purpose. The Fund’s expanded investment mandates are to support new national priorities: an energy transition as part of the net zero transformation of the Australian economy; increasing the supply of residential housing in Australia; and delivering improved infrastructure in Australia. Given how big these three topics are, let’s just consider the energy transition for now.
Compared to others, Australia’s sovereign wealth fund has some catching up to do in the energy transition and the decarbonisation of its portfolios. Two of our near neighbours’ funds, NZ Super and Singapore’s Temasek, leave the Future Fund for dead in reducing portfolio carbon emissions. NZ Super has already moved about 40 per cent of its portfolio to benchmarks aligned to Paris targets. Temasek has committed to a 50 per cent emissions reduction from 2010 levels by 2030 and to emissions being net zero by 2050. Temasek also uses an internal carbon price of US$65 per tonne of CO2 equivalent (tCO2e) and proposes to increase this to US$100 per tCO2e by 2030.
The Future Fund does not aim for any particular level of emissions in its portfolios and does not mention using an internal carbon price in its latest reports. So far, it has only made operational emissions reductions commitments, and related disclosures, in relation to its Melbourne and Sydney premises and not any of its “financed” emissions.
Avalanche of criticism
Reflecting the deeply divided state of Australia’s political stance on climate change, the announcement of the revised mandate has been met with an avalanche of criticism. Critics have prophesied future losses and accused the government of “fiscal vandalism”, creating a “political slush fund”, boondoggling, and conducting a so-called “raid” on the Fund.
Section 18A of the Future Fund Act 2006, introduced in 2007, shuts the gate on most of these critiques. The Fund cannot be directed to invest in a particular asset, activity or business and is also required to invest only via external investment managers. The Fund cannot pursue individual investment opportunities, and certainly not at the direction of politicians. The new mandate did not change any of these settings. “Click” goes the shut gate.
Climate change and the race to decarbonise have the potential to be the most significant macroeconomic challenges for Australia in the 21st century. Unemployment, inflation and economic growth could all be severely impacted by the dramas that might realistically unfold. The World Economic Forum has recently estimated that each one degree Celsius of global warming could reduce global GDP by 12 per cent. This global estimate masks the potential for much more dramatic natural impacts in Australia, including fires, floods and droughts, to name a few.
A frequent criticism was that climate change is a “social” issue, or that trying to ameliorate it is “political”. This would be like saying that fighting Covid-19 was “political” because anti-vaxxers made it so, but it was actually a pandemic, driven by epidemiology. Climate change is caused by global warming from the release of greenhouse gases, which is neither a social issue (although its impacts are) nor an innately political one; again only made so by human beings.
The pursuit of relentless economic growth and resulting profits without regard for the environmental impacts have led to the climate crisis we now face. Australia is a big player in this story and the Future Fund has been, like it or not, a by-product of this type of approach. When scope-3 emissions are counted, Australia is responsible for about 4.5 per cent of global CO2 emissions and the Future Fund’s exposure to fossil fuels has been the subject of widespread criticism. It is the only responsible course of action for this government to want to pull sensible levers to mitigate the climate crisis, while staying within the investment return and governance guardrails established by the Fund’s founders.
The Future Fund can walk and chew gum at the same time. The opportunities available in renewable energy and greening our emissions-intensive economy also create profound capital allocation challenges. Tweaking the Future Fund’s investment mandate to meet these challenges shows leadership where it was most needed.
Jeremy Cooper is chair of the Carbon Advisory Board for Future Group. He is also chair of The Conexus Institute, a not-for-profit think-tank philanthropically funded by Conexus Financial, publisher of Investment Magazine.
