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When pushed for an example of Louisiana’s retirement funds investing in businesses linked to “prohibited nations”—that is, those countries of ill repute cut off from American trade, as defined by the U.S. State Department—Chris Holton weaves a sordid tale about the Paris-based Total S.A., one of the world’s largest oil companies that once developed oil fields for Iraq and Libya.

The company has a tremendous and questionable global reach, doing business in more than 130 countries, of which more than a few are sworn enemies of the United States. As for an explanation, the company has a long-standing policy of not commenting on “political” situations.

Most recently, Total S.A. has been knocked for working in Iran by conservative think-tank groups like the Center for Security Policy in Washington, D.C., where Holton is vice-president of administration and marketing. Sanctions against Iran were established in 1996 by then-President Clinton as the country pursued “weapons of mass destruction.”

Today, Iran remains on the annual prohibited nations list alongside North Korea, Sudan and Syria. Libya was removed from the list in 2004 when it agreed to abandon its own pursuit of chemical, biological and nuclear weapons.

So what does all of this foreign intrigue have to do with Louisiana’s public pension funds, which are bolstered by payments from firemen, teachers, state workers and others?

For starters, those retirement dollars are tied up in Total S.A., and other companies like it, Holton answers. And while the guilt-by-association argument can’t exactly be waged here, the public funds could right what he considers to be a wrong by yanking those investments from their portfolios. “They used to call this trading with the enemy, now it’s just called business,” he says. “But it’s still wrong.”

That cry for morality was heard by state Rep. Pete Schneider, a Slidell Republican who chairs the House Retirement Committee. His legislation to allow 13 of Louisiana’s pension funds to pull their investments in companies connected to terrorism or linked to a prohibited nation was unanimously approved by both chambers during the recent session; there was no organized opposition presented during public debates. Gov. Kathleen Blanco recently signed the legislation into law, and various investments strategies are now being compiled.

On the surface, the bumper-sticker bill is a duplicate of the high-profile legislation recently adopted by legislatures in Florida and Missouri. The same thing was also done, only voluntarily, in Ohio, and similar proposals are pending in 29 other states, all of which Holton, a Mandeville native, is involved with.

Louisiana’s version, however, would extend much further. It calls for the creation of a special terror-free index—thus far the only missing link in the national divestiture trend. Other states, as well as private investors, would be able to get in on the index, Holton says, and it would complement the extremely limited stock of terror-free and socially aware mutual funds already on the market.

Holton and Schneider say there are Wall Street companies willing to generate Louisiana’s index free of charge as long as there’s $200 million to $300 million in investments ready to go. Already, the Louisiana Sheriffs’ Pension and Relief Fund has pledged $50 million and others are figuring out ways to participate. The 13 retirement systems targeted by the bill have about a combined $32 billion in assets. All but one has international investments, Schneider adds, and a few portfolios have as much as 24% invested overseas.

Schneider told lawmakers during the recent session that state governments can play a larger role in U.S. policy, albeit indirectly. “If we own the stocks, then we can make a difference in mandating what those companies can do with their assets,” he says. “We can do this as a collective group, and then go outside of Louisiana, anywhere in the country, and bring in other pension systems.”

David Sobek, a political science professor at LSU with research interests in international economics, says this legislative trend has spurred a series of unanswered political questions over just how far state governments should go in advising U.S. policy and managing public pension funds. “It could potentially make it hard for foreign governments to negotiate trade, especially when they don’t have confidence in the U.S. controlling its states,” Sobek says. “This is also very telling in that what matters globally also matters locally.”

On the financial side, the legislation leaves it up to fund managers to directly put pressure on questionable companies and weed out the bad ones. “Money managers are running screaming from this,” says S. Derby Gisclair, COO of the New Orleans-based Equitas Capital Advisors, a firm with extensive experience in pension funds that presently oversees $3.2 billion in public and private Louisiana assets.

Enforcement will be admittedly difficult, trying to uncover who does business with whom on a daily basis. “We’ll just back away from the business,” Gisclair adds. “We’re not even replying to RFPs. Anyone who says they can do this and make it perform doesn’t know what they’re talking about. This puts Louisiana several steps backwards.”

Peter F. Ricchiuti, assistant dean of the A.B. Freeman School of Business at Tulane University, says the legislation could also force some of Louisiana’s best-performing investments—namely energy stocks—out of public portfolios that badly need financial security. Unfortunately, he says, it’s a “soapbox issue” that could potentially do much more harm than originally intended.

“The retirement systems are already facing so much trouble with unfunded accrued liability [debt], and I don’t think handcuffing them will be any help,” says Ricchiuti, who formerly managed the Burkenroad Mutual Fund program and presently serves as a director at Amedisys, a publicly traded home health care company in Baton Rouge.

Holton is quick to go on the defensive following such attacks. He points to Missouri, where international funds have outpaced the benchmark index by 3.9% since the state went terror-free. He also cites a study by the Securities and Exchange Commission that outlines the losses investors are exposed to by bedding down with companies linked to prohibited nations. “What we’re trying to do here is not a threat to retirement savings,” Holton says. “[Opponents] have no empirical evidence to back up their arguments.”

As for enforcement worries, the legislation calls for “best practices” from stock managers, investors and other sources. Some Louisiana pension funds are even considering building their own terror-free indexes in house. But despite all of the challenges, Schneider says it’s time for the state to take a stand and make an impact. “It sends a message to the rest of the country and world that what we want to do is combat terrorism right here in Louisiana,” he says.