Your Future, Your Super Performance test can be future-proofed with climate benchmarking

Australia has a world-leading superannuation industry – with one of the highest retirement savings per capita than any other country. It is a credential Australia will aim to retain now and in the future.

Australia’s Annual Your Future, Your Super Performance Test can evolve to better direct superannuation funds’ over $4 trillion assets to future-fit investments that build long-term value and resilience.

The global transition to a low-emissions economy is not only reshaping industries – it is redefining long-term economic value. Climate change presents clear financial risks, but transitioning to a low-emissions economy opens up investment opportunities for future industries.

The Your Future, Your Super Performance Test  assesses superannuation products in the MySuper category and trustee-directed product categories against a set of indices according to the respective asset classes. These indices act as a tool to benchmark investment returns to determine whether a superannuation product is performing sufficiently for its members.

Currently, the performance test measures funds against relatively high-emitting indices, with funds investing in line with these indices to meet the test’s performance and tracking error constraints. These constraints, therefore, offer little flexibility for superannuation funds to consider climate when investing.

Climate indices can set Australian superannuation on a more stable path

Australian superannuation assets under management represented 145 per cent of GDP as of December 2023 and are projected to grow to 244 per cent (or AU$34 trillion) by 2061. Redirecting superannuation capital towards climate-aligned companies and projects can significantly contribute to real economy decarbonisation. 

After extensive research and industry consultation, Climateworks recommends adding ‘climate transition indices’ to the performance test as optional benchmark indices for the Australian and international equities and fixed-income asset classes. We note there are a range of climate transition indices currently available in the market, see the table below.

Climate transition indices are more than investment benchmarks – they are tools to help superannuation funds integrate climate opportunities into their strategies and mitigate risk. Unlike traditional indices that rank companies purely by market capitalisation, climate transition indices combine forward and/or backward-looking climate metrics to rank constituents. The result is an index that accounts for both market capitalisation and the decarbonisation performance and targets of the constituents. 

One or more climate transition indices would sit alongside the currently nominated indices as alternatives, which superannuation funds can voluntarily choose to benchmark against. Funds intending to decarbonise their portfolios, or parts of their portfolios, could opt to be measured against this set of climate transition indices.

Table: In-market climate transition indices for Australian and international equities and international fixed income in the performance test

Source: Compiled by Climateworks, derived from publicly available information.

ASSET CLASS	CURRENT BENCHMARK INDICES IN THE PERFORMANCE TEST	IN-MARKET CLIMATE INDICES EXAMPLES ONLY
Australian equity	S&P/ASX 300	S&P/ASX 300 Net Zero 2050 Paris-Aligned ESG Index S&P/ASX 300 Net Zero 2050 Climate Transition ESG Index FTSE Australia 300 TPI Climate Transition Index
International Equity (hedged; international economy type not specified or not applicable)	MSCI All Country World Ex-Australia Equities Index with Special Tax (100% hedged to AUD)	MSCI World Climate Change Index S&P 500 Net Zero 2050 Climate Transition ESG Index
International Equity (hedged; emerging markets)	MSCI Emerging Markets with Special Tax (100% hedged to AUD)	MSCI Emerging Markets Climate Change Index S&P Emerging Plus Large MidCap Net Zero 2050 Climate Transition ESG Index
International Fixed Income	Bloomberg Global Aggregate Index (hedged AUD)	MSCI USD HY Climate Change Corporate Bond Index FTSE World Broad Investment-Grade Climate Transition Benchmark Corporate Bond Index
Australian Fixed Income	Bloomberg Ausbond Composite 0+ Index	MSCI USD HY Climate Change Corporate Bond Index FTSE World Broad Investment-Grade Climate Transition Benchmark Corporate Bond Index

A handful of climate indices are already available in the Australian and international equities and fixed-income market. It is probable that the availability of relevant climate indices in Australia will increase if demand from superannuation funds increases due to inclusion in the test. 

Australia’s signal to companies and investors around the world

Including climate transition indices in the performance test sends a powerful message: Australia is committed to aligning its financial system with the realities of a changing climate and moving to future-proof Australians’ retirement savings. While some funds may want to adopt these indices immediately, others can proceed at a pace and scale that aligns with their investment processes.

With this change, Australia positions itself as a global investment destination, demonstrating to business and financial leaders that its economy is future-ready and climate-aligned.

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This document is for general informational purposes only and does not constitute, nor should it be relied upon as legal, financial, or tax advice.