Introduction

Climate change is widely recognised as a systemic risk for the finance sector. This understanding led to the introduction of the Task Force on Climate Related Financial Disclosures (TCFD) framework in 2017, which provided a roadmap for managing climate-related risks. Since then, financial sector participants, including superannuation funds have been expected to disclose their strategies for addressing climate risks to safeguard long-term financial outcomes for their members and capitalise on climate-related opportunities. The TCFD recommendations have since been incorporated into the International Sustainability Standards Board (ISSB) and Australian Sustainability Reporting Standards (ASRS), which will mandate climate-related reporting, commencing 2025.

Australian superfunds are coming under increased scrutiny to disclose how they are managing climate-related risks, epitomised by the 2018-2020 legal case against Rest Super, where a member alleged that the fund had not adequately considered climate change in its investment strategy. The case highlighted the shifting economic landscape and increasing demand for funds to adopt more transparent and accountable investment practices to address climate change. The case was one of the early catalysts for heightened scrutiny on Australian funds, raising both member and market awareness of climate-related risks. Since 2020, momentum has built culminating in the recent enactment of the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024, which mandates large companies, investment managers and superfunds to disclose their governance, strategy, risk management, metrics and targets in managing climate change.

Climate-related risks and opportunities relevant to superannuation funds

Superannuation funds are universal investors as they cover a diverse range of sectors and financial markets. Whilst this diversification helps mitigate risk, it also inherently exposes funds to a wide spectrum of climate-related risks and opportunities. Superfunds face three climate-related risks: physical, transition and liability risk.

Physical risks

Physical risks arise from direct physical climate impacts, including chronic long-term shifts in climate patterns and severe, extreme weather events. Funds face exposure to physical impacts in all asset classes and sectors, but most directly through their investments in real assets, such as real estate, infrastructure, forestry or agriculture. Damage or disruption to assets or operations caused by severe weather has the potential to significantly reduce the value of assets, resulting in lower returns for fund members. Physical climate-related impacts are expected to become more frequent and severe as greenhouse gas (GHG) emissions increase. Therefore, funds must consider and adapt for these physical impacts in their investment strategies to mitigate potential losses.

Transition risks (and opportunities)

Transition risks stem from the global transition toward a lower-carbon economy, driven by changes in policies, market dynamics, public opinion, and technological advancements. As governments increase regulations and policy aimed at reducing emissions, companies and sectors will be impacted, particularly in sectors where revenues rely on fossil fuels. Carbon-intensive sectors face potential losses from stranded assets (assets devalued by regulation or market shifts), lost revenue as demand decreases, and additional costs associated with regulatory compliance obligations. Funds must therefore consider the need to adjust their portfolios to reduce exposure to high-carbon industries and identify opportunities in companies and sectors that benefit from the transition.

On the flip side, transitioning to a low-carbon economy presents significant investment opportunities for funds. Investing in sectors that will grow and thrive in a low carbon economy, such as renewable energies, electric vehicle R&D, and green infrastructure could lead to higher returns in the medium to long term, and positioning portfolios to capitalise on future growth. A report by BlackRock (2021) stated that sustainable investments outperformed traditional investments in key markets, whilst Allied Market Research (2021) predicted the global electric vehicle market to grow at a compound annual growth rate of 18.2% from 2021 to 2030. IEA’s Renewables 2024 report also stated that prior to the Covid-19 pandemic, renewable energy companies outperformed broader energy sector performance on major stock market indices, with renewable energy manufacturers and producers experiencing 30-70% of equity gains.

Liability risks

Liability risks refer to the legal and reputational risks that arise when funds fail to adequately consider or disclose climate-related risks in their investment decisions. The 2020 Rest Super case is a perfect example of this. As awareness of climate risks grows, funds are increasingly likely to face these liability risks. Norton Rose Fulbright (2022) reported that as of February 2022, the total number of climate change cases filed had reached over 1,890, up from 1,800 seven months prior.

Source: Climate-related risks, opportunities, and financial impact (2017) In Task Force on Climate-related Financial Disclosures, Recommendations of the Task Force on Climate-related Financial Disclosures (p. 11). Financial Stability Board.

Why should super funds care about climate considerations in their portfolios?

Superannuation fund fiduciary obligations

Funds operate under strict fiduciary obligations that are primarily directed by the sole purpose test, which ensures that funds act in the financial interests of their members to the best of their abilities. Increasingly, legal opinions and new regulatory guidance suggest that these obligations now extend to managing climate-related risks, as these pose significant threats to long-term investments. Trustees who fail to address climate change as an investment risk could be seen as breaching their fiduciary responsibilities. However, there is ongoing uncertainty among trustees about how to integrate climate considerations into investment strategies, especially in the short term. Some believe that acting too quickly on climate issues or making substantial portfolio shifts amidst this uncertainty could negatively impact financial returns.

At the same time, superannuation trustees are regulated by the Australian Prudential Regulation Authority (APRA), which has issued guidance on what funds should be doing to manage climate-related risks. While debate continues around the scope of fiduciary duties, one thing is becoming more certain: as members and regulators demand greater transparency and accountability, funds are under growing pressure from stakeholders to integrate climate considerations into their investment strategies.

Member expectations

As awareness of climate change grows, superfund members are increasingly focused on how their money is invested, especially younger generations who value climate-conscious strategies. A 2020 RIAA report found that 86% of Australians expect their superannuation to be invested responsibly, and 67% of Australians aged 18-34 ‘unsatisfied’ with their super fund’s lack of climate action.

Growing demand for fossil fuel-free and climate-conscious investments will continue to pressure funds to adapt their strategies and align with member values. Failure to do so could lead to member disengagement.

External pressure

Public and private investment is needed to deliver clean energy at the scale required – Government public finance alone is not enough. So, with huge sums of capital to invest, super funds have the potential to be key players in the transition to a low-carbon economy. As a result, governments and stakeholders expect funds to play a lead role by integrating climate risk management into their portfolios and allocating capital toward low carbon sectors and assets that benefit members and the economy over the long term.

Funds are also facing regulatory and market pressures. Regulatory bodies such as APRA and the Australian Securities and Investments Commission (ASIC) expect climate considerations to be incorporated into investment strategies. Both have created specific climate-related guidance. Non-government organisations such as Market Forces and the Australasian Centre for Corporate Responsibility (ACCR) are also pressuring funds by raising awareness of the financial risks of fossil fuel investments and advocating for divestment from carbon-intensive companies, shaping public opinion and influencing member expectations.

Barriers to integration and innovation

While superfunds recognise the impact of climate change on their portfolios, most focus on risk management and mitigation. There is little evidence of investment strategies being designed to capture the opportunities for growth, that will come from the transition. However, pursuing ambitious ‘climate-positive’ strategies does not come without challenges:

High degree of uncertainty associated with climate change impacts – both transition and physical – pose challenges. The unpredictable nature of climate-related events like bushfires and floods makes it difficult for investors to confidently assess and price this type of risk. The rate of change in the regulatory and policy landscape, and the low carbon transition, is difficult for funds to predict with any certainty. Superfunds tend to look for stable, predictable returns, and are hesitant to make bold changes to their strategies without quantitative data and certainty in relation to the policy agenda globally.

Volatility of returns – Low carbon assets and sectors have their own uncertainties and returns from these investments may be lower and/or more volatile in the short-medium term. As fossil fuels still dominate our economy, traditional assets and sectors like oil and gas continue to provide strong, reliable returns, making it a challenge for funds to determine the right time to make changes to their portfolio allocations.

Lack of capability – Climate change is complex and systemic, making risk evaluation challenging. Climate change is rarely covered in finance and investment education as ESG integration in investment decisions remains a common issue that requires comprehensive education and training within the finance sector (CFA Institute, 2020), leaving funds without the necessary expertise to integrate it into portfolio management. This area requires specialised skills, yet the pool of professionals with expertise in both investments and climate change remains limited.

Regulatory barriers – add further complexity. Funds struggle to balance short- and long-term obligations, despite recent regulatory measures like the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024, which mandates climate-related disclosures. Inconsistent regulations, such as the Your Future Your Super performance test, further complicate integration. This test benchmarks funds’ performance against indices like the ASX300, which don’t adequately account for the transition economy or Australia’s climate commitments. Since these benchmarks are heavily weighted toward traditional sectors like oil, gas, and mining, they discourage funds from investing in future-focused sectors such as renewable energy technologies.

What should super funds be doing?

APRA’s Prudential Guidance (CPG229) requires regulated superfunds to proactively manage climate-related risks and opportunities in line with APRA’s approach to other types of risks. APRA requires funds to:

• understand climate risks and opportunities
• ensure well-informed investment decisions
• implement appropriate governance, risk management and disclosure practices.

Listed below are some key actions funds could be taking to integrate climate change into their strategies:

1. Adopt mandatory climate-related financial reporting standards

Starting January 2025, superfunds within the ‘Group 1’ classification must comply with Australian Sustainability Reporting Standard’s (ASRS) climate reporting requirements. Superfunds in groups 2 and 3 will be phased in from 1 July 2026 and 1 July 2027 respectively, with group thresholds based on organisational size. While many funds already prepare reports in alignment with TCFD, mandatory reporting will enhance standardisation and credibility of fund reporting and encourage more systematic climate risk management. By adopting these standards, superfunds enhance their accountability to members while improving investor confidence in their climate strategies.

2. Improve risk assessment and data collection processes

Funds must continue to develop robust, systematic processes for identifying climate risks and opportunities. Most funds are still in the early stages of collecting emissions data across their portfolios, making it challenging to fully assess climate-related risks. Data plays a critical role, and setting up processes to collect and monitor data is a significant hurdle for funds, given that funds are heavily reliant on third-party data sources. Investing in data collection and risk assessment tools will help funds better predict climate impacts on investments, and integrating climate risk metrics into portfolio management will enhance risk management and identify growth opportunities.

3. Engage with investee companies to accelerate the transition

By adopting an active stewardship approach, funds can influence investee companies to decarbonise and align with climate goals. This engagement helps mitigate climate-related risks, promotes sustainability, and strengthens the resilience of portfolios. Increased transparency that will come with mandatory climate reporting for companies, will give investors access to the data and information needed to make a more informed assessment of how underlying portfolio companies are progressing – and develop engagement strategies to suit.

4. Collaborate with regulatory bodies and policymakers

Funds should continue to actively collaborate with regulatory bodies and advocate for policies that encourage responsible investment aligned with climate goals. Effective policy is essential at all levels of government to accelerate the private capital flows needed for an orderly and ‘just’ net-zero transition. Initiatives like the Investor Group on Climate Change (IGCC) highlight successful collaboration between superfunds, investment managers and government. Continued support for evolving regulations and advocating for financial incentives supporting low carbon sectors and technologies, will help create the certainty that funds need to invest.

Through these recommendations, Australian superannuation funds can not only manage climate risks but also seize opportunities for long-term growth in a rapidly changing economic landscape.

Resources

Allens (2024) Mandatory climate-related financial reporting legislation: What superannuation funds need to know Retrieved 15 November 2024.

Allied Market Research (2021) Electric vehicle market by type and vehicle class: Global opportunity analysis and industry forecast, 2021–2030 Retrieved 5 October 2024.

Australasian Centre for Corporate Responsibility (n.d.) ACCR: Holding companies accountable Retrieved 18 November 2024.

Australian Government Treasury (2020) Your future, your super: Reforms to make your super work harder for you Retrieved 1 November 2024.

Australian Prudential Regulation Authority (2021) Prudential practice guide CPG 229: Climate change financial risks. Australian Government Retrieved 18 December 2024.

Australian Securities and Investments Commission (n.d.) Sustainability reporting Retrieved 12 September 2024.

Australian Sustainable Finance Initiative (n.d.) Australian Sustainable Finance Initiative Retrieved 2 October 2024. Altiorem: https://altiorem.org/organisation/australian-sustainable-finance-institute-asfi/

Australian Taxation Office (n.d.) Sole purpose test Retrieved 17 September 2024.

BlackRock (2021) Sustainable investing: Resilience amid uncertainty Retrieved 8 September 2024.

Canstar (2023) Sole purpose test: The duty of super funds to act in your best interest Retrieved 21 October 2024.

CFA Institute (2021) Survey of CFA Institute members on latest ESG matters:Views on the integration of ESG factors in investment decision making and sustainability reporting standards for publicly-listed companies Retrieved 12 October 2024.

Climateworks Centre (2024)  Integrating 1.5 degrees Celsius alignment in Your Future Your Super Retrieved 16 November 2024.

Environmental Justice Australia (2020) Rest superannuation climate case Retrieved 18 October 2024.

Financial Stability Board (2017) Final report: Recommendations of the Task Force on Climate-related Financial Disclosures Retrieved 12 November 2024.

IEA (2024) Renewables 2024: Analysis and forecasts to 2030 Retrieved 11 October 2024.

Market Forces (n.d.) Market Forces: Exposing the institutions that are funding environmentally destructive projects Retrieved 18 October 2024.

Norton Rose Fulbright (2024) Climate change litigation update Retrieved 11 October 2024.

Parliament of Australia (2023) Treasury Laws Amendment (Financial Sector Regulation and Other Measures) Bill 2023 Retrieved 9 October 2024.

Parliament of Australia (2023) Treasury Laws Amendment (Financial Sector Reform) Bill 2023 Retrieved 8 October 2024.

Responsible Investment Association Australasia. (2020). From values to riches 2020: Charting consumer demand for responsible investing in Australia. Retrieved 18 October 2024. Altiorem: https://altiorem.org/research/from-values-to-riches-2024-charting-consumer-demand-for-responsible-investing-in-australia/

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