In a potentially devastating blow to the movement toward “socially responsible” investing, California’s public pension fund system is considering reversing its policy of refusing to invest in tobacco companies. The California State Teachers’ Retirement System, the nation’s third-largest public pension fund with $162 billion in assets, could vote as early as this fall on a plan to start buying tobacco stocks, which it has shunned since 2000.

The $248 billion California Public Employees’ Retirement System, the nation’s largest, is also monitoring the issue.

The California pension system wields enormous power, and such a decision would validate other funds also reversing their stance, investment officials said. And as Wall Street contends with an economic slowdown, and many funds struggle to maintain positive returns, pressure is mounting to revisit environmental and social constraints on investments.

“Investing in socially responsible stocks just because they are socially responsible is not — underline not — a valid investment thesis,” a senior investment consultant for the Northern Trust Company, Steven Pines, said.

Socially responsible investing is a $2.71 trillion market, according to the advocacy group Social Investment Forum, but its performance has lagged behind the overall market. The Domini 400 Social Index, a widely recognized benchmark of socially conscious stocks, lost 3.84% in the second quarter, compared with a loss of 2.73% for the S&P 500 Index.

In New York, the pension fund system also faces restrictions, with the $155 billion New York State Common Retirement Fund and the $40 billion New York City Employees’ Retirement System, for example, both prohibited from investing in any new tobacco stocks.

More recently, New York State Comptroller Thomas DiNapoli launched a letter-writing campaign to companies with a presence in Sudan and Iran, with an eye toward possibly instituting a divestiture plan. “The genocide in Sudan and the threats out of Iran have prompted us to initiate a three-pronged strategy to look at our investments in oil companies in Sudan and companies in the energy sector in Iran,” a spokesman for Mr. DiNapoli, Robert Whalen, said. “The prism through which we look at this is fiduciary.”

The first of these prongs is to investigate which of the state’s investments also have involvements in these countries; the second prong is to contact them and initiate a dialogue, and the third is to commence efforts to divest, if necessary. “Especially with Iran, we have left open the option of divestiture, and it could lead up to that,” he said.

As for CalSTRS, it released a report earlier this summer that said it would be $1 billion wealthier if it had been invested in tobacco stocks over the past eight years. It is continuing to investigate the impact of the tobacco divestiture, and will discuss it at its investment committee meeting next month. While the topic is currently listed as informational only, it is possible the board could vote on a reversal of the divestiture campaign this fall, an investment adviser familiar with the fund said.

CalSTRS denies that its decision in 2000 to divest from tobacco stocks was the result of a socially responsible investment strategy. “When we made the decision, there was all of this tobacco litigation, other institutional investors were saying they were going to divest, and there were unprecedented risks to the industry,” a spokeswoman, Sherry Reser, said. The fact that there was a social benefit to the strategy “was icing on the cake.” Now that the risks to the industry have subsided, the fund is considering reversing course.

CalPERS discussed reversing its tobacco divestiture strategy several months ago at a closed-door meeting, and will continue its exploration of the issue, according to a spokesman, Brad Pacheco.

“It will be a watershed event if one of the largest public pension funds, after aggressively adopting socially responsible investment criteria, abandons it,” an adjunct fellow at the American Enterprise Institute, Jon Entine, said. “It would be a huge public statement that this strategy doesn’t work.”

Pension funds are increasingly fighting efforts to limit their investment choices. Most recently, the New Hampshire legislature passed a law requiring its two pension funds divest from any companies with a presence in Sudan. In response, pension officials wrote a letter to Governor John Lynch requesting he veto the bill. In the letter, which was obtained by the Associated Press in an article published earlier this week, the lawyer for the pension system, David Howe, wrote that the law was unconstitutional because “it would require the board to make investment decisions for the purpose other than providing benefits to members and beneficiaries.” Mr. Lynch rejected the veto request, and now pension officials are considering legal action, the Associated Press said.

“Public funds have been feeling pressure to divest from Sudan, Iran, whatever the flavor of the week is,” a managing director at Wilshire Consulting, Michael Schlachter, said. “These funds are now pushing back because it ties their hands.”

In the case of tobacco, many of these funds decided to divest because they are also paying health benefits, and it didn’t make sense to invest in a product that was going to increase their health costs. “That is a pretty good argument, but with that rationale, they would have to divest in McDonald’s, or Anheuser-Busch,” Mr. Schlachter said. The funds also failed to take into consideration that by the time they completed their divestiture, the risks were already reflected in the stock price.

While there are efforts to loosen public pension funds’ reins by repealing investment limitations, there is also a new wave of socially responsible investing that is considered more proactive, analysts said.

Mr. DiNapoli, for example, announced in May that the state was increasing its commitment to private equity funds focused on clean technology to $500 million from $40 million.

“The strategy of screening out certain industries and companies, like tobacco, is falling by the wayside and being replaced with a more proactive approach, where funds are picking companies that are outperformers in the environmental, social, and governance space,” a managing director at Innovest Strategic Value Advisors, Peter Wilkes, said.