Environmental, Social, and Governance Practices and Perceived Tail Risk
39 Pages Posted: 13 Aug 2018 Last revised: 1 Nov 2018
Date Written: July 26, 2018
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.
Keywords: ESG, CSR, Tail Risk, Crash Risk
JEL Classification: G00, G30, M14
Suggested Citation: Suggested Citation