Implementing climate indices: Real stories and Australia’s opportunity 

The annual superannuation performance test has addressed underperformance impacting Australian retirement savings. However, the test’s current structure presents barriers to climate investing. 

To meet performance benchmarks, superannuation funds are currently measured against relatively high-emitting indices. 

While this has addressed superannuation underperformance, it has also directed capital flows to historically carbon-intensive investments.  

With the integration of climate considerations, the performance test has the potential to protect Australians’ retirement savings from the risks of climate change, while also maximising opportunities presented by the energy transition, strengthening a key pillar of Australia’s retirement system.

Previously, Climateworks Centre research has shown several market-ready climate indices that can be incorporated into the performance test. 

Now, research by the Monash Centre for Financial Studies (MCFS), commissioned by Climateworks, shows that climate indices – specifically, Australian and developed markets listed equities indices – stack up against their traditional counterparts.  

This offers a practical tool to help safeguard returns while accelerating Australia’s transition to net zero.

Compared to current benchmarks, some climate indices deliver competitive investment performance with similar levels of risk, while supporting Australia’s climate goals

Findings from MCFS indicate that climate indices have delivered performance on par with, or even superior to, their conventional index counterparts for Australian equity and developed market equity. 

This suggests that aligning these parts of portfolios with climate objectives need not come at a cost to investment returns. 

The same applies to risk considerations, with the volatility and risk of climate indices proportionate to returns.  

Lastly, climate-aligned indices can help reduce Australia’s emissions, with significantly lower carbon intensity than conventional indices.

While there are clear benefits of including climate indices in Australia’s superannuation performance test, their practical implementation remains a key barrier for government and industry. 

Climateworks engaged with leading global asset owners from the United Kingdom and the United States who have successfully incorporated climate indices into their listed asset portfolios. 

Download the summary report [PDF 8.4mb]

Global pension funds are already using climate indices and seeing benefits, including as a means to address long-term climate risks and decarbonise their portfolios

Through interviews with four global asset owners, we examined the rationale, implementation experience and ongoing implications to explore the applicability of climate indices in Australia. 

The study was designed to capture detailed, practical insights from early adopters operating in comparable markets to Australia. We found that:

These findings suggest that climate indices are not a leap into the unknown – they are a practical step forward for Australia. 

With over AU$4.1 trillion in superannuation capital, even a partial shift towards using an optional climate index could unlock billions in productive, transition-aligned investment.

To unlock this opportunity, Climateworks recommends the following:

• Introduce optional climate indices into the annual superannuation performance test to give superannuation funds the flexibility to align their portfolios with climate ambition, without mandating universal adoption.
• Begin with listed equities as the logical starting point, leveraging their data availability and portfolio significance to implement climate indices efficiently and credibly. 
• Ensure the performance test continues to assess investment performance, but against a benchmark that is no longer climate-blind, enabling better alignment between long-term member outcomes and Australia’s economic transition.

Download the case studies [PDF 13.4mb]