Environmental, Social, and Governance Practices and Perceived Tail Risk

Using the implied volatility smirk on individual equity securities to measure perceived tail risk, we find that better environmental, social, and governance (ESG) practices and better practices in each individual E, S, and G pillar significantly reduce ex-ante expectations of a left-tail event. Our findings are robust to the use of multiple model specifications and to adjusting for potential endogeneity concerns. We contribute to the literature by showing that investors consider overall ESG practices and practices within each ESG pillar to be insurance against left-tail events rather than wasteful investment borne out of managers' own values or self-interest