Should Public Plans Engage in Social Investing?

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Social investing is a movement that advocates incorporating social and environmental considerations, as well as financial factors, when making investment decisions.  The most recent incarnation of this movement is the initiative by state legislatures to force public pension funds to sell their holdings of companies doing business in Sudan.  The effort to divest Sudan-linked stocks began in 2004 after the U.S. government characterized the killing and displacement in Darfur province as genocide.  Riding on the coattails of the success of the Sudan effort, state legislatures have now targeted Iran, with a goal of “terror-free” investing.  The emotional appeal of such actions is powerful.  Over 2 million civilians have been displaced and more than 200,000 slaughtered in Darfur since 2003.  And Iran refuses to back away from its pursuit of nuclear weapons.  But strong arguments also exist against using public pension plans to accomplish foreign policy goals.

This brief explores the current world of social investing, the recent efforts regarding the Sudan and Iran, the likely impact of social investing on the target firms, and the reasons why such activity may be inappropriate for public pension plans.