Future Fund a 'beginner' on climate risks

Australia's Future Fund is a "beginner" when it comes to managing climate risk, an independent report has found.

The sovereign wealth fund's board of guardians has almost $250 billion in assets under management, mostly handled by external managers with an eye on long-term returns.

Assessed using established industry tools, the fund scored the lowest level - or "beginner" status - on climate risk investment, investor disclosure and governance, and no evidence of corporate engagement on climate risk.

The report by the independent Centre for Policy Development acknowledged that a full assessment of the climate risk response was difficult because the fund had not published a climate strategy or climate risk disclosure, which researchers said was "concerning".

The fund has not set goals for portfolio decarbonisation, short-term portfolio emissions intensity or green investment, according to the assessment of publicly available information.

Centre director Toby Phillips said, ultimately, climate risks in the Future Fund are borne by taxpayers.

"As citizens of a country with a lot to gain from energy transition and a lot to lose from climate inaction, Australians will naturally be concerned by these findings," he said.

"The Future Fund is a major institutional investor acting on the global stage, and it's reasonable to expect them to play by the same rules as other major investors and asset managers on climate risk."

Although there are no agreed standards, fund managers are increasingly adopting frameworks and strategies for addressing climate risk and decarbonising investment portfolios.

Elsewhere, government-owned sovereign wealth funds and public pension funds - from Japan to Singapore and Norway - have begun to follow suit.

Australia's fund has stated it is responding to climate change risks, but the report's assessment of industry practice among sovereign wealth funds, institutional investors and industry frameworks suggests it is not meeting international best practice.

The report also found it was unclear whether portfolio testing was against sufficiently robust scenarios, such as the International Energy Agency's net zero emissions by 2050 scenario or other scenarios intended to limit global warming to 1.5 degrees.

The federal government could set a stronger direction for the fund on climate change through the official investment mandate and statement of expectations.

This could include requiring the fund to target net zero emissions across its portfolio by 2050.

The report recommends that federal parliament order the Future Fund to publish climate risk information, and be covered by any new laws governing climate risk disclosure in Australia.

Parliament is also urged to set up an independent review by a panel of experienced investment professionals and consider amending the investment mandate so the fund follows industry best practice.

In a statement to parliament this month, Future Fund chief executive Raphael Arndt said best practice "is still being determined", but the fund supports climate risk disclosure from external managers so it can access consistent and standardised data.

The board believes exclusion of fossil fuel-exposed companies would not be consistent with the long-term requirement to meet the fund's investment mandate, he has said.