Implied temperature rise (ITR)
Metric that turns the gap between a portfolio's projected emissions and its share of the carbon budget into warming expressed in degrees.
A fund shows "2.4°C" on its reporting sheet: that is an implied temperature rise, the warming that would follow if the whole economy behaved like the companies in the portfolio. The calculation takes four steps. Each company is allocated a share of the carbon budget consistent with a target, by sector or by uniform contraction. Its emissions are projected from current levels and the targets it has published; MSCI does this through 2050, across scopes 1, 2 and 3. The relative overshoot is measured, then converted into degrees through the TCRE, the transient climate response to cumulative emissions, which the IPCC's Sixth Assessment Report puts at 0.45°C per 1,000 billion tonnes of CO2. The TCFD handed the question to a Portfolio Alignment Team chaired by David Blood. Its June 2021 technical supplement ranks the tools from simplest to most elaborate, binary target, benchmark divergence, then implied temperature rise, which extends the divergence with a conversion into degrees. The consultation drew criticism: in its July 15, 2021 response, the Transition Pathway Initiative saw significant technical weaknesses in these alignment metrics and a risk of poor investment decisions. The objection stands: every step adds a discretionary choice. The reference scenario, the budget allocation rule, the treatment of scope 3, the way holdings are aggregated and the value used for the TCRE, whose IPCC likely range runs from 0.27 to 0.63°C, move the final figure by several tenths. Two vendors therefore give the same portfolio different temperatures. GFANZ took over the work in 2022. For an investment committee, the figure is mostly useful for ranking portfolios computed by the same model.
Textbook case: a portfolio holds two issuers. A's budget is 100 million tonnes of CO2 over the period against 160 projected; B's is 50 against 40 projected. Adding the two holdings together, the budget is 150 and the projection 200, an overshoot of (200 minus 150) / 150 = 33.3%. Applied to the global budget of 500 billion tonnes used for 1.5°C: 0.333 × 500 = 166.7 billion tonnes too many. With a TCRE of 0.45°C per 1,000 billion, that gives 166.7 × 0.45 / 1,000 = 0.075°C, hence an implied temperature of about 1.5 + 0.075 = 1.58°C. With 0.63°C instead of 0.45, the excess rises to 0.105°C and the portfolio shows 1.61°C.
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