Comptroller William Thompson Jr. is defending the use of pension funds as an engine for social change.

“As public pension funds, we can have it all,” he said in prepared remarks for the keynote address at a Harvard Law School national conference on pensions. “We can meet the highest fiduciary standards while revitalizing communities, creating affordable housing, spurring economic development, and investing in clean technology and more.”

Mr. Thompson, a likely candidate for mayor in 2009, praised the city’s practice of investing in institutions with social agendas, such as a variety of funds that promote the construction of “affordable” housing in the city. since he took office in 2002, Mr. Thompson said New York has invested about $500 million in “economically targeted investments,” intended to benefit New York City residents.

Critics have argued that city pension funds should focus only on maintaining the highest possible returns on their investments.

“Whenever you get away from using these funds just as investment vehicles, you run into trouble, particularly when someone else is taking the risk,” a senior fellow at the Manhattan Institute, Nicole Gelinas, said in an interview yesterday. “We have to remember what the purpose of the pension fund is — it’s to pay the pension benefits for retirees.”

Ms. Gelinas said the city pension funds could become politicized if they advocated a social agenda, and that could lead to difficult situations for the comptroller if some of these investments were to fail.

For example, she said, if pension funds invest in buying foreclosed houses from banks, it would be “politically difficult for them to get into a situation where they have to evict tenants or foreclose on homes. It gets far beyond the considerations they should be thinking of, which is how to maximized returns for the taxpayers.”

In yesterday’s address, Mr. Thompson said such criticisms were based on “decades old examples of social investments that were implemented for political purposes,” and that the city’s pension funds would only make investments that they considered to be financially sound. According to Mr. Thompson, returns on economically targeted investments were 6.5% over the last three years, versus 5.48% returns on the Lehman Aggregate, an index used to measure bond funds’ relative strength.

“Critics argue that progress must come at a price, that ETIs sacrifice returns for social benefits,” he said. “Our record in New York City disproves this misguided notion.”