Implications of Temporal Orientation for Sustainability Risk

Abstract

Firms having a short-term temporal orientation has been stressed as a key underlying cause of many sustainability problems, such as poor labour practices in the supply chain, pollution spills, ongoing depletion of natural resources, and inadequate responses to climate change. Yet, negligible evidence has emerged to demonstrate that a longer-term orientation genuinely improves sustainability-related outcomes and risk. The paucity of research may be due to difficulties in measuring and quantifying firm-level data for both the temporal orientation and sustainability risk. Furthermore, establishing a causal relationship between temporal orientation and sustainability risk is challenging due to potential unobservable firm-level attributes and issues related to endogeneity. We synthesize prior research and propose a structured approach using an operations lens that taps into distinct dimensions of temporal orientation, focusing on product-related and other on process-related investment horizons. Using a novel unbalanced panel data of North American manufacturing firms for the period 2007-17 to quantify sustainability risk, we construct and exploit measures for both combined and individual elements of sustainability risk. Using an instrumental variable approach, we find significant evidence that sustainability risk is negatively associated with long-term product and long-term process orientation, and that jointly the two create a reinforcing effect. Thus, our research informs the managerial community for their long-term investment decisions to proactively mitigate sustainability risk.