Australia’s $3 trillion APRA-regulated super sector cannot sit out the transition to a low-carbon economy. But despite years of climate commitments, less than one per cent of super fund assets appear to be allocated to targeted, climate-related investment activities. This mismatch between rhetoric and reality is not sustainable — financially or environmentally.

A new proposal calls for a bold step: introducing a mandatory value of emissions reduction (VER) framework across all APRA-regulated super funds. The concept, drawn from Australia’s energy regulation model, would make climate risk an explicit part of investment decision-making. For the financial sector, this could be the most significant shift in portfolio construction since the rise of modern risk diversification.

The reality is that climate stewardship has not yet translated into the kind of measurable portfolio decarbonisation Australia’s new climate goals demand. As APRA’s own prudential guidance (CPG 229) reminds trustees, climate change represents a material financial risk. But perhaps because it is guidance, not law, many boards are yet to adopt a zero carbon mindset.

A mandatory VER would change that. It would not impose a tax, nor transfer money to anyone. Instead, it would function as a notional internal carbon price — a consistent benchmark for super funds to apply when evaluating investments. By treating future emissions as a cost today, a VER would bring climate risk out of the footnotes and into the spreadsheet.

The Australian Energy Regulator (AER) already publishes an official VER — currently $66 per tonne of CO₂e, rising to $420 by 2050 (in 2023 dollars). It is used in assessing electricity network proposals and is embedded in the National Electricity Objective. Extending that same framework to super would align the financial system with the energy system, providing consistency, transparency and a credible price signal. Experts could quibble about the correct figure for super, but that can be resolved by policymakers in consultation with the industry.

A VER for super would work like this: when a fund evaluates a potential acquisition, it adds a notional surcharge representing the cost to the planet of the project’s expected emissions. For example, a large infrastructure deal emitting 100,000 tonnes of CO₂e annually would carry an additional $7.5 million “shadow cost” at a $75 per tonne VER. That cost isn’t paid, but it changes the project’s risk-adjusted return — steering capital towards cleaner assets.

The effect would be profound but subtle: carbon-intensive projects would become less attractive not because of ideology, but because they carry more explicit, up-front financial risk. Conversely, renewables and low-emission technologies would become more competitive on a risk-adjusted basis. It’s climate policy translated into the language of finance.

Australia’s super system has both the capital and the long time horizons to support the energy transition. A 20-year-old joining the workforce today will still be investing in 2050 and still drawing down their super in 2080 or 2090. Looked at this way, decarbonisation is also a retirement income issue. This member’s retirement security depends on a stable climate. A framework that factors in climate risk over those timeframes isn’t activism — it’s prudence.

A VER framework would embed decarbonisation within the fiduciary logic of the system. It would make climate risk management part of the best financial interests duty, not a distraction from it. After all, trustees already accept lower expected returns in exchange for diversification benefits. Incorporating a carbon value is no different — it is simply recognising another material risk.

Some super funds already apply internal carbon prices voluntarily. But the prices vary widely, making comparisons difficult at best. A uniform, mandatory VER would create a level playing field, ensuring consistent methodologies across the APRA-regulated sector.

The reform could be introduced in stages, starting with the Future Fund as a pilot. As a sovereign wealth fund with a long-term mandate, the Future Fund is well placed to test implementation and reporting standards before expansion to all APRA-regulated funds.

Integration could occur through APRA’s mooted amendments to CPS 220 (Risk Management), which are expected to make managing climate risk an explicit prudential obligation for super. Alternatively, the VER could be enshrined in a new prudential standard, carrying legislative weight but allowing flexibility for adjustment over time.

Critics might argue that applying a VER could disadvantage Australian bidders when competing for global assets. But that argument echoes those made against financial reporting, ESG disclosure and anti-bribery laws — all of which became global norms once someone led. Moreover, the Foreign Investment Review Board could offset any short-term distortions by factoring carbon accountability into foreign acquisitions, ensuring all bidders face a similar benchmark.

For markets, a mandatory VER would bring clarity and consistency. Investors crave predictable rules and stable signals. For too long, Australia’s climate policy has been marked by reversals and political churn — from the abandoned carbon price in 2014 to the uncertainty around the Future Gas Strategy. The 2025 national target of a 62–70 per cent emissions cut by 2035 has set an ambitious, but achievable, decarbonisation pathway. A superannuation VER would help cement it.

Incorporating a VER is not a moral statement; it’s a financial safeguard. It helps prevent portfolios from becoming stranded in assets that markets will inevitably reprice as climate risk crystallises. It rewards foresight and punishes complacency.

In short, a mandatory VER framework is a way to price the planet into finance — ensuring that every investment made with Australians’ retirement savings contributes to, rather than undermines, their long-term financial future.