Australian investors increasingly see performance test as climate investing barrier

By the end of the week, Australia would have closed a consultation for reforming the Your Future Your Super (YFYS) performance test. The test, first introduced in 2020, has been criticised for unintentionally curtailing climate solutions investing.

A new survey by the Investor Group on Climate Change – a coalition of Australian investors – shows the degree to which investors see the test as a climate investing barrier. Data for 2026 shows 49% now report YFYS as an investment barrier, up from 27% two years ago.

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Investment barriers

The findings were published as part of IGCC’s flagship State of Net Zero Investment report. The underlying survey covered 21 asset owners and 34 asset managers collectively representing nearly $2.4tn under management.

The report finds faltering investor confidence, despite Canberra’s efforts to bolster the country’s energy transition. “Institutional investors remain largely downbeat about conditions in Australia for climate investing”, it reads.

“Investors see that the move to net zero is happening, but Australia can’t take their capital for granted”, says IGCC chief executive Rebecca Mikula-Wright.

Investors reported a wide range of barriers. Three-quarters of respondents cited a lack of appropriate risk-adjusted return opportunities. 56% raised concerns over regulatory uncertainty. One in five asset owners said investment conditions had worsened and 67% of asset managers reported a lack of client demand.

In that context, the YFYS test has risen up the climate investment barrier ranks. Two years ago, 27% of respondents said it was a concern. That proportion has expanded in 2026 to 49%.

In the build up to the on-going consultation, the test’s ‘benchmark hugging’ design emerged as a key investor criticism alongside its short term focus. In response, the government pledged to ‘strengthen’ the test, in a bid to address sustainable investment concerns.

The IGCC report frames diverging YFYS views between asset managers and owners as one of the more striking shifts in this year’s survey data.

“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 outlines.

Case in point

This year’s report also includes a case study of an unidentified superannuation fund that illustrates the YFYS effect at play. JANA Investment Advisors, a consultant, provided the case study.

The analysis highlights the case of a superannuation fund seeking to strengthen its climate approach within a passive listed equities portfolio. Complying with YFYS regulatory requirements was a key piece of the puzzle.

“The portfolio had to maintain a passive-like approach: low cost, low turnover, minimal tracking error, and minimal deviation from YFYS benchmarks in sector and country weightings”, the case study highlights, “any climate methodology would have to work within these constraints, not around them”.

JANA’s analysis shows that YFYS compliance and net zero alignment might be challenging but the two are not mutually exclusive. “The finding is significant: improved net zero alignment is achievable within the risk-return constraints of a YFYS-compliant passive portfolio”, it reads.

The IGCC report paints a picture of climate capital allocation facing gusty headwinds down under. Reforming the YFYS is one among many options at Canberra’s disposal. As the consultation draws to a close, submissions will hold crucial clues about what investors expect a strengthened performance test to look like.

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