Can investment portfolios effectively promote specific social policies while earning the highest rate of return for investors? Should pension fund managers invest to promote social or political causes? Pension Fund Politics: The Dangers of Socially Responsible Investing (AEI Press, 2005), edited by AEI’s Jon Entine, answers both questions with a resounding no.

Entine highlights some of the financial failures of “socially responsible” investing. With little fiscal oversight or pensioner input, some states have invested in socially acceptable companies known as “Green Giants”-including Tyco, Arthur Anderson, Enron, and WorldCom-with disastrous results. Divesting of certain stocks has also resulted in lower returns, as Entine notes that since two of California’s largest public pension systems sold $800 million worth of tobacco shares in 1999, the American Stock Exchange Tobacco Index has outperformed the S&P 500 by more than 250 percent and Nasdaq by more than 500 percent.

Alicia H. Munnell of Boston College and Annika Sundén of the Center for Retirement Research discuss how firms divesting of holdings in South Africa in the 1980s because of apartheid had little effect on corporate operations or financial markets within South Africa. They argue that investments based on social causes also tend to yield significantly smaller profits because they restrict stock diversification.

In his chapter, Charles E. Rounds Jr. of Suffolk University contends that when state officials make investment decisions for public pension funds based on political considerations, they often compromise their responsibility to safeguard the investments of their constituents.

Moreover, Jarol B. Manheim of the George Washington University suggests that “the ‘reform’ agenda of SRI advocates and their activist allies is designed to weaken the ability of corporate directors to make decisions independent of shareholder pressure,” making U.S. corporations less competitive in the global marketplace.

Entine asks: “Should we encourage public pension funds to boycott tobacco companies . . . or natural resource firms that do not embrace global-warming initiatives, even though a boycott would have no discernible impact on the operations or profits of these companies but would risk devastating the returns of pensioners who often have little say in what’s being done in their names?”