Asset owners in Australia and New Zealand view ESG information primarily as a safeguard against risk rather than a source of higher returns, according to a new study from the CFA Institute Research and Policy Center.

The report, “Integrating ESG Information into Long-Term Investment Strategy,” found that while ESG considerations are increasingly acknowledged as material to investment outcomes, they rarely determine strategic asset allocation decisions.

Instead, financial returns, peer performance and regulatory compliance dominate the long-term investment strategies of large pension funds.

“Financial factors are more important than ESG at the moment, but it is still early days for the top-down approach,” said co-author Winnie Wong, CFA.

ESG Secondary to Financial Priorities

Survey data and interviews with 18 asset owners representing more than half of Australia’s regulated superannuation assets showed ESG integration remains concentrated at the asset class level, not at the level of strategic asset allocation.

Tools such as climate-aware capital market assumptions, stress testing, and scenario analysis are used; however, their influence on portfolio construction is limited by data gaps and uncertainties in modeling climate risks.

All survey respondents said they viewed ESG primarily as a risk consideration rather than a driver of value creation. That focus stems from concerns that climate transition risks are not fully priced into markets, exposing portfolios to potential losses if left unmanaged.

A few smaller asset owners reported outperforming benchmarks after divesting from fossil fuel–intensive assets, suggesting that ESG considerations could deliver returns under certain strategies. Still, the majority of larger funds said ESG considerations have yet to reshape their long-term allocations.

Regulation Adds Constraints

Australia’s AU$4.1 trillion superannuation industry is one of the world’s largest pension systems, with assets projected to become the second biggest globally by 2031. But regulatory constraints such as the “Your Future, Your Super” annual performance test weigh heavily on investment decisions, the study said.

The test measures fund performance against benchmarks over 10 years, and repeated failure can force funds to close to new members. This has discouraged some funds from pursuing ESG-aligned strategies that deviate from benchmarks and increase tracking error.

Non-regulated funds, such as sovereign wealth entities, reported greater flexibility to pursue climate goals, including higher allocations to renewable energy and Paris-aligned benchmarks.

Climate Takes Priority Over Social, Governance

The study found that environmental and climate considerations primarily drive ESG integration in the region, while social and governance factors remain less developed due to their greater complexity in quantification.

Asset owners also cited the challenge of reducing carbon exposure in domestic equities, given the heavy fossil fuel weighting of the S&P/ASX 200 index.

Allocating more to international equities could lower portfolio carbon intensity, but the real-world impact on emissions is unclear, the authors noted.

Outlook for Deeper Integration

Despite current limitations, most asset owners expect to enhance their ESG integration over the next three to five years, with a focus on climate-aware capital market assumptions, scenario testing and net-zero targets.

“CIOs and boards need to be deliberate about how ESG fits into their list of competing priorities,” Wong said. “Without that clarity, ESG will remain more of a safeguard than a source of long-term value.”