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record is hypothetical and the portfolios have not been traded together in the manner shown in the composite. No representation is being made that any investment will or is likely to achieve a composite performance record similar to that shown. Unlike an actual performance record, hypothetical results do not represent actual trading. Also, since the performance presented does not represent an actual performance portfolio, there are numerous other factors related to the market in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results. Past performance is not indicative of future results. I thank Matt Moran and participants at the 2009 CBOE Risk Management Conference and the ISOM University of Massachusetts Finance Seminar series for comments and suggestions and Christian Blanke for excellent research assistance. Please address correspondence to Edward Szado, CISDM,

Using the implied volatility smirk on individual equity securities to measure perceived tail risk, we find that better environmental, social and governance (ESG) practices significantly reduce ex‐ante expectations of a left‐tail event. Our findings are robust to using multiple model specifications and to adjusting for potential endogeneity concerns. We also show that, while practices in each ESG pillar are important in reducing perceived tail risk, the environmental pillar plays the most important role. Our results indicate that investors consider strong ESG practices to be insurance against left‐tail events rather than wasteful investment borne out of managers’ own values or self‐interest.

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