Department of Labor guidance has, until recently, “clearly stated that plan trustees or other investing fiduciaries may not accept higher risk or lower returns in order to promote social, environmental, or other public policy causes,” the brief said.

Related: New DOL guidance on ESG factors explored

It also pointed out that “[t]he bulk of social investing assets are in public pension funds … and screening in these funds is pervasive,” totaling $2.7 trillion in 2014—more than half of their total assets.

However, private defined benefit plans hold “almost none of the screened money,” probably thanks to coverage by the Employee Retirement Income Security Act of 1974 (ERISA). In addition, DOL interpretation of ERISA’s duties of loyalty and prudence has been “stringent.”

In 2015, DOL went so far as to say that ESG factors could have a direct impact on the economic value of a plan’s investment.

But while it said that ESG factors could be incorporated into the financial assessment of an investment, it did not address the use of ESG factors for screening potential investments.

The brief analyzed how divestment laws affect rates of return on public pension assets, and also considered other factors, such as the effect on plan participants and on taxpayers of ESG decisions reached by trustees, particularly if social investing produces losses, as well as the difficulty of determining pricing preferences in choosing investments in a changing social environment.

It concluded that ESG investing is not suited for public pension funds, in part because its effectiveness is limited and also because “it distracts plan sponsors from the primary purpose of pension funds—providing retirement security for their employees.”

And since decisionmakers don’t bear the risk of possible losses, it creates a principal-agent problem. To read the brief, visit the Center for Retirement Research website.