Does Targeting Investment Make Sense?

Economically targeted Investments (ETIs) are capital projects that are expected to provide economic benefits to the economies of the regions in which they occur. Pension plans have been encouraged by both public officials and other constituencies to factor these collateral benefits into the decision-making process when selecting investments. Detractors see this as social investing that constrains portfolio choice, compromises the integrity of the pension fiduciary, and results in sub-optimal financial performance. Proponents agree that investment performance standards should be kept at a high level. However, they point out that externalities, such as new job, broader tax bases, and stronger local economies, are real and that they can be important to a pensions plan's participants and beneficiaries under the right circumstances. This article argues that carefully selected ETIs may improve the overall performance of a portfolio of pensions assets and benefit plan participants in the process. The critical prerequisite to consider an investment's externalities is assessing whether the project will probably be financed by another investor if turned down by the pension fund (the relatively efficient market model ) or will fail to find a suitable investor ( the inefficient market model ).