What is ITR? and the implication to your investment decisions?
- EcoVision
- 3 days ago
- 4 min read
Implied Temperature Rise (ITR) is a metric used in ESG and climate finance to estimate how much global temperatures would increase by 2100 if the whole economy behaved like a given company, portfolio, or investment.
It translates emissions performance and climate targets into an easy‑to‑interpret temperature score (e.g., 1.5 °C, 2.7 °C, 4 °C).
What ITR Represents
ITR answers the simple question:“
If all companies followed the same emissions pathway as this one, what level of global warming would result?”
It aligns corporate emissions trajectories with IPCC‑style climate scenarios.
How ITR Is Calculated (conceptually)
Different providers (MSCI, S&P, CDP, etc.) use slightly different models, but they share the same steps:
(for the differences in calculation methodolgodies by different vendors, we can go thru into more details in coming newsletters, step by step.....)
Baseline emissions
Measure current Scope 1, 2, and often Scope 3 emissions.
Future emissions trajectory
Project the company’s emissions through 2050 based on:
Company targets
Past emissions trends
Sector‑specific decarbonization pathways (e.g., IEA, IPCC)
Temperature model
Compare the projected trajectory to global carbon‑budget scenarios to infer the temperature pathway.
Portfolio-level aggregation (if needed)
Temperature scores for each security are weighted (e.g., by market value or attributed emissions) to get a portfolio ITR.
Typical Interpretation
≤ 1.5 °C → Aligned with the Paris Agreement.
1.6–2.0 °C → Near‑aligned.
2.1–3.0 °C → Misaligned / high‑risk.
> 3.0 °C → Strongly inconsistent with net‑zero.
Strengths
Easy for non‑experts to understand.
Allows comparison across industries and portfolios.
Connects corporate actions to global climate outcomes.
Limitations
Strongly dependent on assumptions about future emissions and technology.
Sensitive to data quality, especially Scope 3.
Different providers give different scores.
Implies a precision that isn’t truly achievable.
How Investors Use ITR
ITR helps investors understand how aligned a company or portfolio is with a Paris‑aligned climate pathway.
It turns complex emissions data into a single simple score that signals transition risk and long‑term climate exposure.
What Different ITR Values Suggest
• 1.5–1.6 °C
Indicates strong alignment with net‑zero pathways.
Suggests lower transition risk, but check target credibility and progress.
• 1.7–2.0 °C
Near‑aligned.
Transition risk still manageable; improvements or clearer targets may be needed.
• 2.1–3.0 °C
Misaligned.
Implies higher transition risk due to potential carbon pricing, regulation, stranded assets, and competitive pressure.
• ≥3.0 °C
Highly misaligned.
High vulnerability to policy shifts and market transitions; may be flagged for engagement, divestment, or portfolio de‑risking.
*always remember and be-careful to the corporate sustainability due to the "Transition Risk"!
How to Interpret ITR in Real Investment Decisions
1. Risk Assessment
Use ITR to gauge a company’s exposure to:
• Carbon‑pricing costs
• Regulatory pressure
• Technological disruption
• Reputational damage
A high ITR often signals future earnings pressure under stricter climate policy.
2. Engagement Prioritization
Investors often target companies with:
• High ITR
• Large portfolio weight
• High emissions contribution (esp. Scope 3)
These become priority engagement candidates for setting credible decarbonization targets.
3. Portfolio Construction
Low‑ITR companies can be:
• Overweighted in climate‑aligned strategies
• Used in net‑zero pathway funds
• Integrated into factor models that combine ITR with financial metrics
In opposite, High‑ITR holdings may require:
• Reduced weighting
• Thematic replacement
• Adding offsets through other holdings
4. Scenario Analysis
Interpret ITR alongside:
• Carbon budget gaps
• Sector‑specific decarbonization pathways
• Alternative alignment metrics (SBTi targets, PCAF data, ACT scores)
ITR on its own is not a forecast; it’s an alignment indicator. It gives you more "signal" & "ideas"!
5. Comparing Companies
ITR is particularly useful for:
• Comparing across sectors (e.g., utilities vs tech)
• Identifying leaders/laggards within a sector
• Evaluating the credibility of emissions targets
For example, a company claiming “net‑zero by 2050” but showing a ~3 °C ITR has a weak or unachievable pathway.
6. Tracking Progress Over Time
Investors monitor whether a company’s ITR:
• Trends downward (improving alignment)
• Stagnates (targets not implemented)
• Worsens (increasing transition risk)
This helps assess management’s execution capability on climate strategy.
Important Caveats
• ITR can vary significantly across data providers (MSCI vs S&P vs CDP). Since they are using different methodologies.
• Heavy reliance on projected data means uncertainty is high.
• Always check inputs: Scope 3 quality, target validation, sector pathway used.
Real World Corporate Examples
Here are real, public corporate examples where major providers have published or disclosed temperature‑alignment / ITR values.
These are not hypothetical; they come from publicly referenced datasets (MSCI, CDP/SBTi, Transition Pathway Initiative, and provider‑published alignment reports).
*Note: ITR values vary by provider, so ranges are common.
1. Microsoft
Provider: MSCI, SBTi/ CDP
Reported alignment: around 1.4–1.6 °C
Why:
• Microsoft has validated 1.5 °C SBTi targets
• Aggressive target to be carbon negative by 2030
• Strong performance on Scope 2 reduction (renewables)
• Scope 3 progress slower but still aligned with 1.5°C pathway
Interpretation:Microsoft is widely seen as one of the closest to Paris‑aligned large‑cap companies.
2. Apple
Provider: MSCI, S&P, SBTi/ CDP
Typical alignment: ~1.5–1.7 °C
Why:
• Supplier decarbonization program covers large parts of Scope 3
• Near‑term 2030 reduction target consistent with 1.5°C
• Low operational emissions (Scope 1–2)
• Slight misalignment arises from supply‑chain emissions pace
Interpretation:Strongly aligned, though supply‑chain complexity introduces uncertainty.
3. Shell
Provider: MSCI, Transition Pathway Initiative (TPI), S&P
Typical alignment: ~2.7–3.0+ °C
Why:
• Current emissions trajectory misaligned with net‑zero
• Targeted reductions insufficient in near term
• Heavy dependence on oil & gas capex
• Scope 3 dominates and remains largely uncoupled from targets
Interpretation:Commonly flagged by asset managers as high‑ITR / high transition risk.
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