Institutional appetite outstrips climate investment opportunities: IGCC

A latest survey by the Investor Group on Climate Change (IGCC) found while there is an increased appetite for climate investments among Australian institutional investors, sentiment remains downbeat due to a shortage of climate-aligned opportunities.

The State of Net Zero Investment 2026 surveyed 55 respondents including Australian institutional investors and global managers with Australian operations, in total managing $3.5 trillion in assets on behalf of Australians.

Asset owners identified a shortage of climate-aligned investment opportunities as the primary barrier for the past two years, overtaking policy uncertainty.

In contrast, asset managers who manage capital on behalf of asset owners cited a lack of client demand and net zero-aligned investment management agreements as a top barrier to climate investing.

"These findings point to a persistent disconnect between institutional practices and capital allocation decisions," the report read.

The report highlights four factors hindering capital allocation at scale: uncertain tax settings, lengthy approval processes, outdated superannuation benchmark, and a lack of coordinated energy and industrial planning.

"The drivers for the difficulties in realising energy transition opportunities are multifaceted. Globally, countries compete for clean energy workforces, components, and secure supply chains - and they do so at a time of geopolitical instability across key trade corridors," the report read.

"In addition, in times of crisis, the temptation to revert to available fossil fuel sources remains real."

A globally uncertain environment calls for a clear and harmonised domestic policy settings for patient capital deployment, the report added.

"The real need is for the overall policy environment in Australia to be clear, and for there to be good, strong signals to the market that there is going to be long-term support for action on climate at that policy setting level, and that's when a lot of those concerns go away," IGCC director of investor practice Duncan Paterson said.

The report noted a faltering in the momentum of government's Capacity Investment Scheme (CIS) which underwrites revenue for renewable energy generation and clean dispatchable storage projects.

"Coupled with structural challenges across the electricity sector - including workforce shortages, supply chain constraints, and slow planning and approval processes - this may explain investors' growing demand for clearer government direction," the report read.

"Rapidly addressing workforce constraints, planning processes, and electricity market reforms remain essential tasks to enable the renewables rollout that investors and the economy require."

While the current geopolitical environment may create political pressure to reduce climate policy ambition, the report highlighted investors want stronger policies, not weaker ones.

The report also noted several studies have identified structural issues in the Australian regulatory landscape for superannuation funds that, if corrected, would help unlock institutional investment in decarbonisation opportunities, including in earlier-stage innovation and climate tech.

Treasury is currently consulting reforms to address benchmarking-hugging incentives encouraged by the superannuation performance test.

Treasury acknowledged the industry's concerns super funds are constraining their investment universe and staving off allocating to assets outside the mainstream to ultimately pass the test or reduce underperformance.

The IGCC survey found a divergence between asset owners and asset managers on the performance test as a barrier to climate-aligned investing.

"Among asset managers, significantly more asset managers nominated YFYS as a barrier to climate investment in FY26, compared to FY25. In contrast, fewer asset owners nominated YFYS as a barrier in FY26, compared to FY25, albeit modestly," the report read.

Paterson noted the difference arises on the fact that asset owners have much longer investment time horizons than asset managers.

"It shouldn't be at all surprising to see that some of the considerations that asset owners have around the importance of an orderly transition are in terms of their ability to pay out their beneficiaries, often over 20,30,40-year time horizons. Those can be quite different motivations to the asset manager who needs to make sure that they are carrying out the shorter-term objectives of their clients," he said.

A recent report by Market Forces found Australia's top 30 superannuation funds directly contributed $771 million to the $99 billion invested in renewable energy projects since 2020. The analysis noted that while funds may have 'indirect' investment exposure through asset managers into renewable energy projects, quantifying the extent of this exposure is impossible without further disclosure.

The Market Forces report also identified benchmark performance as a barrier to investment in renewable energy.

"One such barrier is the Your Future, Your Super performance test, which can penalise funds for holding the kinds of long-duration infrastructure assets that renewable energy projects represent," Market Forces said.

"Some funds already engage in public policy advocacy, individually and through industry bodies, which is a positive step. Yet the sheer size of the super industry means its advocacy efforts could be wielded much more effectively to secure policy settings that enable a rapid and equitable clean energy transition in Australia."