Jim Chalmers rewrites $230bn Future Fund’s mandate to favour green energy, housing investments

Jim Chalmers is overhauling the investment mandate of the Future Fund to drive ­capital into Labor’s agenda, in a major shift in the role of the sovereign wealth fund established by the Howard government.

Times are grim … Jim Chalmers in question time on Wednesday. Picture: Martin Ollman / NewsWire

Jim Chalmers is overhauling the investment mandate of the $230bn Future Fund to drive ­capital into Labor’s agenda on ­affordable housing, green energy projects and critical infrastructure, in a major shift in the role of the sovereign wealth fund established by the Howard government nearly two decades ago.

In a move that will likely see the role of the “independent” Future Fund become an election issue, the Treasurer will on Thursday change its mandate and require it to consider new “national priorities” for investment decisions.

The national priorities under the mandate will be: increasing the supply of residential housing; ­supporting the energy transition for the net-zero transformation; and delivering infrastructure ­projects that will improve domestic supply chains.

In an aim to blunt Coalition ­attacks over the change of the mandate, Dr Chalmers has committed to keeping the fund’s capital locked up until 2032-33, an extension of six years, when it would then be used to fulfil its role in helping pay the pensions of ­retired public sector workers.

While declaring the government is committed to the Future Fund’s “independence and commercial focus”, the Treasurer is also keeping its mandated average ­annual return rate at between 4 and 5 per cent above inflation while arguing there will not be any change to its risk profile.

“The fund’s primary focus will remain on maximising its returns, and at the same time, our changes will help it maximise its role in delivering for Australians in the future,” Dr Chalmers said, in a joint statement with Finance Minister Katy Gallagher.

“The fund will provide the same strong returns to the government’s balance sheet while ­supporting national priorities where it can, and complementing the significant investments made by our specialist investment vehicles including the Clean Energy Finance Corporation, the National Reconstruction Fund, and Housing Australia.”

Dr Chalmers – who this year appointed former union leader and Labor minister Greg Combet as the Future Fund’s chair – said the revamp of its mandate would help the fund play a “crucial role in our economy” over decades.

Future Fund chair Greg Combet. Picture: James Croucher

“The Australian economy faces major structural shifts including from the global net-zero trans­formation, technological and demographic change, and global fragmentation,” he said.

Peter Costello established the Future Fund when he was treasurer in 2006 to help pay for the commonwealth’s ballooning public sector superannuation liabilities, seeding it with a $60bn ­investment.

The overhaul to the fund’s ­investment processes is likely to spark strong condemnation from the Coalition.

Opposition Treasury spokesman Angus Taylor argued earlier this year that it was “crucial” the fund’s investment mandate not be altered to invest in “Labor’s ideological pursuits”.

“The Future Fund’s investment mandate has been very clear: to invest for the long-term bene­fit of the country,” Mr Taylor said. “It must not become a slush fund for Labor’s ideological pursuits or the Treasurer’s thought bubbles.”

The mandate established by Mr Costello and updated by Scott Morrison in 2017 does not outline any priority areas for the fund’s investments. The board was instead instructed to target a benchmark return rate, have regard for best-practice corporate governance principles, and consider the ­impact of its investment strategy on the operation of financial ­markets and Australia’s inter­national reputation.

Mr Costello was appointed to the Future Fund board by Kevin Rudd in 2009 and served as chair from 2014 until he was replaced by Mr Combet this year. Shortly before his tenure as chair ended, Mr Costello warned against changing the mandate of the fund to direct it for political projects.

Peter Costello earlier this year.

“If people start thinking they can take this money and direct it to various purposes of their own, the game would be up, there wouldn’t be any point in continuing to have an investment fund,” Mr Costello said. “We invest for return. That’s what we’re here for”.

Former Commonwealth Bank chief executive David Murray, the Future Fund’s inaugural chair, similarly warned that the sovereign wealth fund would inevitably become a “tempting target for politicisation”. He argued that “political freeloaders” risked raiding the investment vehicle for their own pet projects.

“Ongoing calls for superannuation funds to invest in ‘nation-building’ assets could easily be echoed for the Future Fund,” Mr Murray wrote in a paper published this year by the Centre for Independent Studies.

“This would undoubtedly distort the optimum asset allocation resulting in lower returns, as the private sector would not invest on the same terms.”

Welcoming the overhaul to the Future Fund’s investment processes, Mr Combet said the board would prioritise generating commercial returns and pledged to remain “independent of government”. “The priority areas are aligned with the Future Fund’s thinking as set out in its position papers and consistent with its investment focus,” he said.

He announced the body would appoint a new executive director to oversee its green-energy investments.

“We have also long recognised the importance of environmental, social and governance issues in our investment process and will add resources in this area,” he said.

Last month, Mr Combet said the fund was searching for investment opportunities that would help decarbonise the economy, such as its stake in solar and wind power supplier Tilt Renewables.

The performance of the Future Fund is key to the returns of a suite of off-budget spending investment vehicles established by Labor, including the $10bn Housing Australia Future Fund and the $15bn National Reconstruction Fund, as both are administered by its board. Last financial year, the fund delivered a return of 9.1 per cent, taking its 10-year average rate of return to 8.3 per cent and comfortably outpacing its target of 6.9 per cent over that period.

In an effort to ward off any opportunity for politicians to dip into the savings to fund favoured projects, then prime minister John Howard and Mr Costello established a structure such that its investment decisions were at arm’s length from government.

The fund is required to invest via external managers and has additional restrictions on its operations that prevent it from having too much exposure to any one asset.