The Battle of the Acronyms: SRI Versus ESG

Content provided by Kostya Etus, CFA, Portfolio Manager

Values-based investing has been making headlines and growing a lot of assets recently. What is it? There are many definitions, and it can mean something different to everyone. But, I believe the following are some unifying classifications:

  • Socially Responsible Investing (SRI) is the “old school” or “traditional” values-based investing strategy. It is referred to as “exclusionary” screening, as the methodology is to exclude stocks from an index. These are typically “sin stocks,” such as those in the tobacco, alcohol, and firearms industries. The strategy dates back decades and really became popular in the 1980s as investors wanted to divest from the South African economy to pressure the government to end apartheid.


  • Environmental, Social, and Governance (ESG) is the “new school” values-based investing strategy. It is referred to as “inclusionary” screening, as the methodology is to include companies that exhibit favorable traits, including:
  1. Environmental — reducing fossil footprint, managing resources wisely, etc.
  2. Social — respecting human rights, culture, workplace equality, product safety, etc.
  3. Governance — stewardship for shareholders, transparent, accountable, etc.


  • Impact investing is the “future school.” It is the investment in companies that specifically benefit the world, environment, communities, etc. For example, working towards the United Nations Sustainable Development Goals. These goals include, but are not limited to, eradicating poverty and hunger, promoting good health, quality educations, gender equality, clean water, and clean energy.

Since impact investing is a relatively new concept, and there are not many publicly traded investment options, my comparison will be between SRI and ESG.

SRI has received a bad reputation over the years. One negative connotation is that investors pay a higher expense for a screen that still leaves them with market-like exposure, and thus, consistent underperformance versus the broad market. The second belief is that SRI investments tend to be negatively correlated with the energy sector (since many oil companies are screened out). So, much of the performance can be explained by moves in oil prices.

ESG looks to address these issues through its inclusionary process. The thesis is that ESG is a risk factor attributable to historic returns. This factor is a component of quality within companies. More stable and profitable companies:

  1. Have money to spend on bettering the environment,
  2. Care about their employees,
  3. And, have diversified boards of directors that keep their shareholders in mind.

Therefore, these companies should perform better over time. Specifically, they should have more confident management that could be able to weather market downturns and potentially avoid lawsuits from financial and environmental wrongdoing.

As you can see in the chart below, sustainable investing has shown strong growth of 33% since 2014. We believe this growth may continue as more values-conscious millennials begin saving for retirement. And, we believe ESG will be increasingly important to financial advisors and asset managers. Please stay tuned as CLS is currently working on a new white paper on ESG investing that will summarize current published research and include our own research showing the benefits and evolution of ESG.


Why (Risk-Adjusted) Return Expectations Matter

Content provided by Joseph Smith, CFA – Senior Market Strategist

  • Formulating return expectations is an important component of disciplined investing.
  • Return expectations often fall prey to being unadjusted for risk.
  • At CLS, we evaluate return expectations (CLS Edge Score) after adjusting for risk via Risk Budgeting.

Being a disciplined investor requires an expectation of what is likely to happen in the future. Many practitioners have taken multiple approaches to forming return expectations for a given asset class, sector, or region in the markets. Return expectations are intended to guide investors as to where the best opportunities (on average) may lie.

One of the biggest problems regarding return expectations is that some investors fall prey to evaluating these outcomes without acknowledging the uncertainty or associated risk. A sector that has the potential to generate a 10% return on paper could look on par with a risk-laden region that has an exact same 10% return expectation.

To tackle this challenge, we look hard at opportunities by first aggregating our return expectations based on interest rates, valuations, fundamentals, technical, and changes in risk into what we often refer to as the CLS Edge Score. From there, the CLS Edge Score is adjusted for the degree of associated risk via our Risk Budgeting Methodology. This gives us a much better gauge as to whether or not the potential reward is worth the risk and what capital we should choose to outlay.

Looking at our return expectations today, the best opportunities are primarily abroad in international and emerging market equities, not the U.S. In fact, Asia represents well over double-digit gain opportunities even when the Risk Budgets are factored in. Within emerging markets, the Asia-Pacific region presents the best opportunities for superior risk-adjusted returns.

Investors should keep in mind that risk-adjusted return expectations are the keys to properly evaluating the markets. Accounting for risk in any part of the investment decision-making process can help ensure a much smoother ride for clients in the long term. We accomplish this by marrying our work on the CLS Edge Score with our Risk Budgeting Methodology.



Orion Weekly: The Ascent Conference and U(2)

Watch today's Orion Weekly to learn how to maximize your online presence and get ready for an exciting way to spend one evening at the Ascent conference.

The post Orion Weekly: The Ascent Conference and U(2) appeared first on Orion Advisor Services.


How to Maximize Your Online Presence

maximize your Online Presence

Here are some tips on how to use technology, including mobile apps, social media, blogs and more, to maximize your online presence and grow your business.

The post How to Maximize Your Online Presence appeared first on Orion Advisor Services.


Amendments to Form ADV and the Books and Records Rule

An investment adviser filing an initial Form ADV or an amendment to an existing Form ADV on or after October 1, 2017 will be required to use a revised Form ADV.  (Changes to Form ADV can be found here:  Additionally, amendments to Rule 204-2 (the “Books and Records Rule”) of the Investment Advisers Act of 1940 will apply to communications circulated or distributed after October 1, 2017.

Amendments to Form ADV will require an adviser to provide additional information regarding its advisory business, including information regarding its separately managed account business, other offices, and social media accounts for which the adviser is able to control the content associated with the account (e.g., Facebook, Twitter and LinkedIn). The amended Form ADV will also create an “umbrella registration” on a single Form ADV (within a new Schedule R) for multiple private fund adviser entities operating a single advisory business under certain conditions.

In addition, amendments to the Books and Records Rule will modify recordkeeping obligations as to certain materials relating to an adviser’s performance or rate of return. For example, the amended rule will require advisers to maintain materials that demonstrate the calculation of performance or rate of return in any communication circulated or distributed directly or indirectly to “any person” rather than to “10 or more persons” as the rule currently requires.  These amendments considerably expand the scope of the Books and Records Rule to encompass all performance related communications, including but not limited to custom calculations requested by a single investor or potential investor. Additionally, advisers will now be required to retain original copies of all written communications related to performance or rate of return that are sent to or received from any third party.

All advisers are encouraged to promptly review their current operational practices and determine what modifications, if any, will be necessary to ensure continued compliance with all applicable regulations.

The Final rule can be found here:

7475 GFS-7/25/2017


Q & A with

CLS’s Case Eichenberger, CIMA, Client Portfolio Manager sits down with Creighton University’s Nicholas Arreola, PhD, Data Scientist, Developer, to discuss behavioral finance.


Orion Weekly: Pack your bags!

Watch today's Orion Weekly to learn more about data queries to support GIPS, an Orion Ascent update, and a custom onboarding experience with Catalyst.

The post Orion Weekly: Pack your bags! appeared first on Orion Advisor Services.


Are You All Packed for Your GIPS Verification?

GIPS verification

We worked closely with a verification firm to build GIPS verification queries to help our Advisors get data they need to become GIPS compliant.

The post Are You All Packed for Your GIPS Verification? appeared first on Orion Advisor Services.


Don’t Let Malware Make You “WannaCry”

Content contributed by NorthStar IT

On May 12, 2017, an unpresented wave of ransomware spread via the internet hitting organizations and individuals around the world. The ransomware known as “WannaCry” quickly became front page news.  The purpose of the ransomware, developed by cyber-criminals, was to extort money. The way it accomplished this was to infect unpatched Windows PCs and encrypt 176 different file types (picture files, documents, spread sheets, video files, database files, etc.) leaving the files inaccessible. Then, to unencrypt the files, a ransom had to be paid using the cryptocurrency known as Bitcoin. Average ransom amounts started at $300 and increased incrementally over time until, at seven days, if unpaid, all encrypted files were permanently deleted from the user’s system and lost forever.

The was delivered through a hyperlink that could be embedded in emails, web page advertisements, or in a Dropbox links. If a user clicked on any of these links, the PC secretly accessed a website where the virus resided. If the PC did not have the appropriate PC patches or anti-virus software installed, the PC downloaded malicious code which then started the file encryption process and displayed the following message:

Hundreds of thousands of PCs around the world were impacted by this virus. Hospitals, banks, and telecommunications companies were some of the hardest hit industries.

(CLS, Orion, and The Gemini Companies) avoided this outbreak. But how?

At NorthStar, before any computer traffic enters the network, it has to pass through a series of hardware devices and software which closely inspects all bits and bytes for malicious content. Based on very complex and sophisticated rules, logic, and algorithms, some traffic is blocked outright, some is quarantined for review, and the rest is allowed onto the network. However, even with these tools in place, it is possible for new variants of malware to come up and make it past these tools. In the event something does slip through our perimeter defenses, NorthStar also has tools that reside on servers, desktop PCs, and laptops to contain and mitigate any compromise. These tools add an additional layer of protection to detect, prevent, quarantine, and clean malicious content from end-point devices (PCs, Laptops, SmartPhones, etc.).

For those who are interested in technical details, below is a list of many of NorthStar’s security tools and what they do:

  • Email Security Gateway: this product scans all inbound emails and searches them for malicious attachments and embedded links that could take users to malicious sites. If found, the software will quarantine the emails for review or outright delete them if known to be malicious.
  • Intrusion Detection\Intrusion Prevention Systems (IDS\IPS): These systems inspect network traffic at a very low level (bits and bytes). Upon detection of suspicious content, they will automatically block it before it can enter NorthStar’s systems. In addition, these systems filter out traffic from specific geographical locations known to be the source of malware (e.g. Russia, Iran, etc.).
  • Advanced Network Anti-Malware: These systems scan for and detect attacks and malicious network packets as well as command and control communications. “Command and control communications” is when malware communicates back to a home base for additional attack code or content. WannaCry is an example of malware that uses command and control communications.
  • Web Filtering: Web filtering programs block access to sites that have known malicious content. NorthStar’s web filtering software is actively updated with lists of malicious sites, so as soon as any site is registered or detected to have the ability to spread malicious content, it is automatically updated and will block users from accessing those sites.
  • Advanced EndPoint Anti-Malware: This is advanced anti-malware tools installed on the (PC installed). It works similarly to and in conjunction with NorthStar’s Advanced Network Anti-Malware, but on the PC level as opposed to the network level.
  • Anti-Virus Software: This is a traditional anti-virus program which actively scans and monitors traffic to and from each PC looking for malicious software. In addition, the software utilizes traditional virus scans of a PC’s local hard drive to detect anything that might be on the hard drive, but not active.
  • Log Collection: This is a system which collects and analyzes PC, server, and network logs looking for questionable activity WITHIN the internal networks searching for activity that could get in via an internal source like a PC USB port, a DVD, or personal computer plugged into a company network port (which is strictly forbidden in our Employee Policy Manual).
  • NorthStar also has robust data recovery tools that can be used to quickly recover systems and data if such an attack like this was successful and original files needed to be restored.

In addition to having the above tools in place, NorthStar ITOC took the following additional steps and precautions when the WannaCry outbreak was discovered:

  • NorthStar double checked that the appropriate Microsoft patches were installed which stop this virus.
  • NorthStar enabled Snort Rule 42340 – A new rule for our IDS\IPS systems which was developed to stop WannaCry once it was detected and started spreading.
  • NorthStar confirmed firewalls were blocking malicious traffic on the specific ports\channels the virus communicated over.
  • NorthStar confirmed TOR network blocking – TOR is an external anonymous network that is notorious for spreading malicious content, so we doubled checked our settings to make sure we were blocking this traffic.
  • NorthStar confirmed all Advanced Malware Protection systems and software had been updated to detect this ransomware signature.
  • NorthStar confirmed the email security gateway was scanning for this specific

As you can see, NorthStar takes cybersecurity very seriously. From the technical tools in place to the audited and certified ISO 27001 processes and controls, NorthStar is committed to investing the necessary time and money for industry leading technology, processes, and people.