Public Pensions Pensions

The growth of state and local government pension assets has led to an appreciation of their economic and political power. Many state and local government employees' pension plans have consequently been active in social investing. This term refers to investment decisions where an investor or money manager factors in ethical or social priorities. Social investors are concerned with such issues as companies' environmental records, treatment of employees, behavior in foreign markets, and connection to controversial products such as tobacco.

Private sector pension plans are prohibited from making investments designed to further socially desirable purposes at the expense of the plan's rate of return. State and local government plans are not subject to this restriction and consequently have been more likely to engage in social investing. However, some social investors also believe that firms that behave ethically are likely to provide a better investment return than those that do not, and, indeed, returns in many social investment funds have exceeded those in many standard indices. Moreover, while state and local plans are not subject to the ERISA requirement that plan assets be invested using the "care, skill, and diligence" of a prudent individual acting "solely in the interest of plan participants," most public plans have adopted similar language.

Many institutional investors—prominently public pension plans, but private plans as well— are also concerned with the governance of publicly traded corporations. Governance concerns include the election and independence of directors, including the disclosure of sufficient information for investors to ascertain independence; the appointment and conduct of board committees; the allocation and exercise of shareholder voting rights; board composition and accountability to shareholders; and the level of director and management compensation. Many state and local government plans pursue these and other governance concerns as a way to protect plan assets and increase return on their investments as part of their fiduciary obligations.