The federal government will direct the Future Fund to invest in housing and the green energy transition where profitable, in the most consequential role change in its 18-year history.

The government will also give medium-term certainty to the $230 billion fund by promising not to draw down on its holdings for at least eight years, until 2032-33.

The move had been foreshadowed by Finance Minister Katy Gallagher and Treasurer Jim Chalmers and was welcomed by the fund's board of guardians.

It aligns with the ambition of its new chair, ex-Labor minister Greg Combet, to invest more in energy.

The new ministerial directive will reiterate that the Future Fund's primary objective is to maximise returns, and it will still be required to earn 4 to 5 percentage points above inflation each year on average, a benchmark it comfortably exceeds.

The new priority areas, which also include security infrastructure, would be subordinate to this aim, made only "where possible, appropriate and consistent with strong returns."

In a joint statement, the two ministers said the new mandate would "mean more investment where we need it most but not at the expense of returns".

Mr Combet said the announcement reflected "confidence in the work we do" and would allow the fund to stay focused on delivering a return while adding to its portfolio of energy and infrastructure investments.

But the change will likely attract the ire of the fund's creator and former chair, ex-Liberal treasurer Peter Costello, who has long been protective of its strict focus on making money and warned in 2021 that diluting it would be "the beginning of the end".

Australia's gargantuan rainy day fund

Mr Costello established the fund with a $60.5 billion injection in 2006. Grown through investments, that is now worth $230 billion, one-third the size of the Australian economy.

The average annual return over the past decade has been a high 8.3 per cent.

Strictly speaking, the fund was set up to pay for the pensions owed to public servants, but it was also conceived in broader terms as a fund to benefit future taxpayers, especially as the population aged and demands on the federal budget increased.

It has never been drawn down or added to by governments, although several satellite funds have been established, including the Abbott government's medical research fund and the Albanese government's social housing fund.

The returns of those funds are used to finance policy priorities, but the principal amounts are invested in much the same way as everything the Future Fund oversees: to make money.

There are limited restrictions on this, including that the Future Fund must not take on undue risk, diminish Australia's reputation or own enough of a company to trigger a takeover.

But apart from this, it is left free from interference and its mandate is changed rarely, most recently in 2017 when the Turnbull government lowered its target return from 4.5–5.5 percentage points above inflation to 4–5, reflecting the prevailing low interest rates.

Push for a broader scope

There have long been calls to rethink this limited remit, mostly in progressive circles.

Many similar sovereign wealth funds around the world have more prescriptive investment strategies, some to suit the whims of rulers as in Saudi Arabia, but others to achieve public policy outcomes.

A prominent example is that of Norway, which established a fund after discovering oil in the North Sea. That fund differs from Australia's in that it only invests overseas, so as not to distort Norway's tiny economy, which it dwarfs.

But it is directed to invest up to 2 per cent of its wealth in renewable infrastructure, and there are provisions for governments to draw down a small amount each year to supplement public spending, accounting for one-fifth of Norway's budget.

In the Australian context, the Greens have called for a more activist Future Fund, urging divestment of its sizeable holdings in fossil fuel companies and use of its influence as a shareholder to lobby for greener company practices.

Labor's stated ambitions are more modest, a "refresh" of the Future Fund rather than a rethink, which ministers expect will mainly serve to highlight socially beneficial investments the fund is already making, something Mr Combet has also mentioned.

But the move aligns with Jim Chalmers's enthusiasm for directing public and private capital towards social problems, an approach he called "values-based capitalism" in a 2023 essay and has also discussed in the context of the superannuation sector.

Costello warning against 'pork barrelling'

The Coalition, which raised the issue in Senate estimates earlier this month, was expected to take a more conservative view aligning with that of Mr Costello, who was scathing of the push to reform the fund in his final address as its chair last November.

"The people who manage the Future Fund are called guardians. The name was chosen for a reason. Their duty is to guard this legacy against foolhardy schemes to spend it.

"These schemes come from all sorts of sources: the public, self-styled 'experts', members of parliament, even some in the government," he said.

While the government has expressly ruled out spending the fund, Mr Costello can be expected to take an equally dim view of altering the mandate.

"We're not here to fund road construction in Taree. We're not here to build a port for somebody in Mackay, Queensland," he said in remarks on the fund's 15th anniversary.

"Once we lose our focus, which is: we're here to get a financial return, and we start giving ourselves over to pork barrelling, that's when you've lost it."