In 1980 public and private pension funds totaled more than $550 billion, owned more than 25% of all publicly traded stock, and controlled more than 40% of all debt capital in the United States. Pension fund assets are expected to surpass $1.3 trillion by 1985.

Although pension funds exist for the benefit of workers, control of the assets rests with trustees who, in turn, usually turn over the funds to a bank, an insurance company, or an independent investment manager. Control of the investment of such vast sums necessarily confers power to influence the economic and social direction of the nation. While investment policies have been traditionally dictated by purely economic considerations, growing concern for the social consequences of investment decisions now poses new questions of both law and policy. To the partisans of “socially responsible” investing, investments are more than a vehicle for financial return; investment practice includes support or repudiation of the conduct of the entity invested in.

Interest in directing investment funds for social goals has focused on issues concerning nuclear power, export of infant formula to third world countries, military and media policies. Unions have demonstrated interest in the labor policies of the corporations in which they invest; likewise, state and local governments favor investing pension funds to benefit the community of the participants. However, no issue in the ethical investment controversy is more far-reaching than the issue of investment in companies which do business in South Africa. Investments which support South Africa’s “apartheid” policy exemplify what partisans of socially responsible investing want to avoid.

The South Africa issue is a paradigm of the extent to which notions of social responsibility may be permitted to enter into pension fund investment decisions. The focus is not clouded by the financial benefits which might flow to pension beneficiaries from creating a stronger union or community, as is the goal of some other kinds of nontraditional pension fund investment. The benefits are ethical. The debate has been snarled by competing interpretations of the traditional requirements of investing: “prudence” and the “sole benefit of the beneficiaries.” Presently, three states, Connecticut, Massachusetts, and Nebraska, have overridden these traditional investment guidelines with legislative action on the South Africa issue. In a fourth state, Wisconsin, the state Attorney General’s interpretation of an older statute has produced a similar effect.

These innovations by partisans of socially responsible investing are creating tensions in an area of law where significant questions of policy and procedure remain unresolved. Although many studies have analyzed investment policies for private sector pension funds, which are stringently regulated under federal law, no study has examined these new state actions restricting public pension funds. This study will describe briefly the nature and structure of public pension plans. It will then trace the evolution of the concern for socially responsible investing which has resulted in states restricting South African investments in their plans. The study will next examine the various approaches taken in implementing this policy.

The core of this study is an analysis of the legal issues raised by legislating socially responsible investment of state pension funds. Before these issues are reached, factual questions about the effectiveness and the financial consequences of restricting South African investments are considered. The study concludes by suggesting practical guidelines for the future: elements essential for successful state statutes and techniques for accommodating the competing interests.