A new brief from the Center for Retirement Research at BostonCollege says that environmental, social and governance (ESG)screening of investments in public pension plans can have anegative impact on returns and fiduciary goals, making ESGinvesting unsuitable for those plans.

Related: Can CalPERS live with responsibleinvestment returns?

The brief by Alice Munnell and Anqi Chen said that publicpension funds ventured into ESG investing in the 1970s with a focuson divesting from apartheid South Africa, later turning to“terror-free” investing and divestiture from gun manufacturers andmost recently targeting fossil fuels because of climate changeconcerns.

But should public funds engage in this practice? That's theissue Munnell and Chen dissect and discuss.

Department of Labor guidance has, until recently, “clearlystated that plan trustees or other investing fiduciaries may notaccept 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 factorsexplored

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

However, private defined benefit plans hold “almost none of thescreened money,” probably thanks to coverage by the EmployeeRetirement Income Security Act of 1974 (ERISA). In addition, DOLinterpretation 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 adirect impact on the economic value of a plan’s investment.

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

The brief analyzed how divestment laws affect rates of return onpublic pension assets, and also considered other factors, such asthe effect on plan participants and on taxpayers of ESG decisionsreached by trustees, particularly if social investing produceslosses, as well as the difficulty of determining pricingpreferences in choosing investments in a changing socialenvironment.

It concluded that ESG investing is not suited for public pensionfunds, in part because its effectiveness is limited and alsobecause “it distracts plan sponsors from the primary purpose ofpension funds—providing retirement security for theiremployees.”

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