Future Fund’s Combet outlines institutional investment opportunity in net zero transition

The incoming chair of Australia’s sovereign wealth fund believes institutional investors could play a role in the winding road towards net zero.

Appearing before the press club last week in his capacity as chair of the Net Zero Economy Agency, a role he will step down from mid-2024 to join the board of the Future Fund, Greg Combet said the net zero transition is a “story of great opportunity” in Australia.

“We are uniquely endowed with abundant renewable energy and mineral resources, a skilled and resilient workforce, engineering and technical capability, large pools of capital; we have a stable investment environment and are a reliable trading partner and right now, we can see the chance to use these endowments to secure prosperity for future and current generations,” he said.

Last year, the Albanese government announced it would legislate a national Net Zero Authority and spend $400 million to help manage the transition to net zero.

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According to the government statement, the authority is intended to support workers in emissions-intensive sectors to access new employment, skills, and support; coordinate programs and policies to support regions and communities to attract and take advantage of new clean energy industries; and help investors and companies to engage with net zero transformation opportunities.

Answering a question from the audience, Combet confirmed there was no sunset clause in the Net Zero Economy Authority Bill 2024 that was introduced to Parliament last month.

“There’s no sunset clause in the bill, but if it does its job successfully over the next 25 or 30 years, I can imagine someone thinking ‘job done, don’t need that anymore’. That’s a possibility that would emerge,” he stated.

Combet also noted that the net zero transformation remains a “very significant investment task”, which could present opportunities for investors to deploy private capital alongside the government.

“Ideally, institutional investors, private capital would see the opportunities in it and make commercial judgements and invest – and they are, where they can see that making sense,” Combet explained.

“But I can see occasions and projects in this particular transformation where government is going to need to play a role. That’s not novel – electricity infrastructure in the past has been virtually all public infrastructure, it’s only been privatised in recent decades.”

He admitted this was a “tough challenge” for private investors, given the legal requirements and permissions required, which he said the net zero authority would have to work through in coming years.

“Where it’s proving difficult for something that’s clearly in the public interest, a particular project to take place and government’s having a good look at it and considering whether or not there’s a role for government to provide concessional debt or equity investment to help derisk a project – that’ll have to be done in a disciplined and rigorous way because no one wants to deploy taxpayer money unnecessarily,” he suggested.

“But you can see that a partnership in some particularly significant transformative projects is likely going to be necessary.”

The Future Fund’s piece of the puzzle

However, the incoming chair of the Future Fund stopped short of elaborating on the role of the $211 billion fund in the net zero transformation.

Responding to an inquiry on whether the fund was “the perfect vehicle”, Combet stated he “wouldn’t prognosticate upon such a thing.”

“Going to the Future Fund, and obviously I take it very seriously, it’s got an investment mandate that government has determined [and] going in as chair of the Future Fund, that’s what I have to deliver and that’s all I’ll be focused on,” Combet said.

Earlier this year, Combet’s predecessor Peter Costello had also dismissed proposals to revise the Future Fund’s mandate towards climate-driven investments as “foolhardy schemes.”

“Saving money is the hard part of politics. Spending it is easy. It was a great achievement, against the odds, to tuck away some savings and invest it into a mature, well-run, successful and respected sovereign wealth fund,” Costello said in January.

“If it is spent, it will never be replaced, Australia will be more exposed, and our financial position will become more precarious.”

The Future Fund Investment Mandate Direction 2017 was issued to the Future Fund board on 15 May 2017. It requires the Future Fund board to adopt a benchmark average return for the fund of “at least the Consumer Price Index (CPI) +4.0 to +5.0 per cent per annum over the long term”. In striving for this benchmark return, the Future Fund board may pursue an acceptable, but not excessive, level of risk.

Future Fund chief executive Dr Raphael Arndt also mentioned the board considers “investment stewardship” and takes into account various “other issues” despite the Future Fund’s detailed mandate.

“We do have a lot of investments in Australia domestically across infrastructure and some technological areas like AI-related investments, data centres, and renewables,” said Arndt.

“We are a large investor in one of the largest wind and solar developers in the country. So, all of that is happening within the Future Fund portfolio, without any need for the government to reduce or to complicate the mandate.”