Paris Alignment Tools: PACTA, TPI, and Implied Temperature Rise
What Tools Measure Whether a Portfolio Is Paris-Aligned?
Portfolio Paris alignment — assessing whether a portfolio's investments are consistent with limiting global warming to 1.5°C or well-below-2°C — requires specialized analytical tools that translate climate science scenarios into portfolio-level assessments. Three major tools have emerged as industry standards: PACTA (Paris Agreement Capital Transition Assessment), developed by the 2° Investing Initiative; the Transition Pathway Initiative (TPI), developed by the London School of Economics Grantham Research Institute; and Implied Temperature Rise (ITR), developed by MSCI and others. Each takes a different methodological approach, covers different universe of companies, and produces different outputs — but all attempt to answer the same fundamental question: how consistent is this portfolio with Paris Agreement climate goals?
Quick definition: Paris alignment tools are quantitative frameworks that assess whether investment portfolios are consistent with limiting global warming to Paris Agreement targets (1.5°C or well-below-2°C) — by comparing portfolio companies' emission trajectories, production plans, and stated targets against climate scenario pathways that are consistent with those temperature goals.
Key takeaways
- PACTA (Paris Agreement Capital Transition Assessment) measures alignment at the sector level by comparing portfolio companies' production plans (in physical units — megawatts of power generation capacity, vehicles sold, barrels of oil) against IEA climate scenario production plans. It is particularly suited for sector-specific analysis in energy, power, automotive, cement, and steel.
- The Transition Pathway Initiative (TPI) assesses companies' governance and management quality for carbon transition alongside their emission performance, providing both management quality scores (1-5) and emission performance assessment relative to climate benchmarks. TPI data is publicly free and widely used for engagement.
- MSCI's Implied Temperature Rise (ITR) combines each company's stated emission targets and current trajectory, maps them to warming scenarios using a carbon budget approach, and produces a portfolio-level temperature alignment expressed in degrees Celsius. ITR is widely used in commercial portfolio analytics.
- The three tools use different inputs (production plans vs. emission performance vs. stated targets), different methodologies, and produce different but complementary assessments — investors increasingly use multiple tools for triangulation.
- All Paris alignment tools face common limitations: Scope 3 data quality constraints, uncertainty in scenario assumptions, and the fact that portfolio alignment metrics measure portfolio characteristics, not real-world emission reduction outcomes.
PACTA: Production-Based Alignment
What PACTA Measures
PACTA compares the physical production plans of portfolio companies in climate-critical sectors against IEA climate scenario production capacity plans for those same sectors. Unlike carbon footprint metrics that measure current emissions, PACTA looks at what companies plan to produce over the next 5 years — and whether those production plans are consistent with a transition pathway.
Covered sectors: PACTA covers sectors where physical production data is available and climate-critical:
- Power generation (coal, oil, gas, renewables: capacity in gigawatts)
- Oil and gas (upstream production in barrels of oil equivalent)
- Automotive (vehicle production by technology: ICE, hybrid, BEV)
- Coal (mining production in tonnes)
- Cement (production capacity in tonnes)
- Steel (production capacity in tonnes)
- Aviation (limited coverage)
Not covered: Financial services, technology, consumer goods, and other sectors where GHG emission intensity matters but physical production data is not the primary driver.
How PACTA Works
- Portfolio construction data: The investor's portfolio holdings are identified.
- Company production plans: PACTA uses commercial databases (Asset-level data from Bloomberg, Wood Mackenzie, SP Platts) to identify each company's current and planned production capacity in each covered sector.
- IEA scenario benchmarks: IEA scenarios (Sustainable Development Scenario, Net Zero Emissions scenario, and Stated Policies Scenario) provide sector-by-sector production capacity pathways consistent with different temperature outcomes.
- Alignment comparison: For each sector, the investor's portfolio companies' combined production plans are compared to the relevant IEA scenario pathway. If portfolio companies plan to expand coal capacity while the IEA NZE requires rapid coal phase-out, the portfolio is "misaligned" with NZE for coal.
Output: Sector-by-sector alignment assessments showing which sectors are aligned, overperforming, or underperforming relative to selected climate scenarios.
PACTA's Strengths and Limitations
Strengths: Physical production data is more verifiable than emission estimates; production plans reveal future commitment regardless of current emission performance; covers critical capital-intensive sectors; free availability via 2DII enables broad adoption.
Limitations: Only covers eight sectors; does not assess companies' stated targets (only actual production plans); requires quality asset-level production data that is not always complete; forward-looking plans may change as market conditions evolve.
TPI: Management Quality and Emission Performance
What TPI Assesses
The Transition Pathway Initiative, managed by the LSE Grantham Research Institute and available freely at transitionpathwayinitiative.org, provides two complementary assessments for each covered company:
Management Quality Score (1-5 levels):
- Level 0: Not assessed or no awareness of climate issues
- Level 1: Acknowledges climate change is relevant
- Level 2: Building foundations — basic emission inventories and policies
- Level 3: Developing — quantitative short-term emission targets
- Level 4: Advanced — comprehensive emission targets and TCFD-aligned disclosure
- Level 5: Strategic assessment — full integration of climate risk into business strategy, Scope 3 coverage, scenario analysis
Emission Performance Assessment: Compares each company's current and projected Scope 1 emission intensity against benchmarks consistent with 1.5°C, well-below-2°C, and business-as-usual scenarios.
How TPI Is Used by Investors
Engagement benchmarking: TPI Management Quality scores identify companies below Level 3 (basic quantitative targets) as engagement priorities. Major pension funds in the CA100+ initiative use TPI management quality scores to assess engagement progress.
Portfolio management quality distribution: Aggregating TPI management quality scores across a portfolio shows the overall distribution of climate governance quality.
Emission performance screening: Companies whose emission performance is above the business-as-usual benchmark (i.e., more carbon intensive than the global average trajectory) are performing worse than the status quo on climate — a significant signal.
TPI data is free and widely used: Unlike commercial Climate VaR tools, TPI data is publicly available and has been adopted by institutional investors globally including major pension funds (LGPS, CalPERS, Brunel, GPIF) as a primary climate assessment tool.
MSCI Implied Temperature Rise
How ITR Is Calculated
MSCI's Implied Temperature Rise tool assigns each company a temperature alignment score in degrees Celsius, based on:
- Current trajectory: What emission reduction trajectory is the company currently on (based on historical performance trends)?
- Stated targets: What reduction trajectory does the company claim to be targeting (based on disclosed targets, including SBTi-validated targets)?
- Carbon budget approach: How much of the global remaining carbon budget does this trajectory imply the company is using, relative to its share of the global economy?
- Temperature mapping: What level of global warming would result if all companies used the same share of the carbon budget as this company?
Output: A temperature in degrees Celsius, expressed as "this company is aligned with [X]°C of global warming."
Portfolio ITR: The weighted average ITR across all portfolio holdings, weighted by portfolio allocation. A portfolio ITR of 2.1°C means the portfolio is collectively consistent with 2.1°C of global warming if all companies followed the same emission trajectory.
ITR Limitations
Sensitivity to target quality: ITR gives significant weight to stated targets. A company that declares an ambitious but unvalidated net-zero target will have a low ITR regardless of whether the target is credible. This creates potential for target washing in ITR scores.
Scope 3 challenges: For sectors where Scope 3 dominates (oil and gas, automotive), ITR models that rely on Scope 1 and 2 data may significantly underestimate carbon budget consumption.
Aggregation challenges: Portfolio ITR is a weighted average, which can mask significant within-portfolio variation. A portfolio with a 1.8°C average ITR might contain some companies aligned with 1.5°C and others aligned with 3.5°C — the average masks the distribution.
Paris alignment tool comparison
Combining the Three Tools
The three tools are complementary rather than competing:
PACTA answers: What are portfolio companies actually planning to produce, and is that consistent with the transition?
TPI answers: How well-governed and managed is each company's approach to the climate transition? Are they at a management quality that will translate stated commitments into action?
ITR answers: What temperature trajectory is implied by the portfolio's collective emission targets and current performance?
Using all three provides a more complete picture than any single tool:
- A company can have a high MSCI ITR rating (good stated targets) but low TPI management quality (weak governance) — suggesting targets are aspirational rather than credible
- A company can have good TPI management quality but misaligned PACTA production plans — suggesting strong governance is not yet translating into production decisions
- A portfolio can have a low portfolio ITR while having PACTA misalignment in specific sectors — suggesting the aggregate temperature metric masks sectoral problems
Regulatory Requirements for Paris Alignment Assessment
EU Paris-Aligned Benchmark: Funds using the PAB label must demonstrate ongoing alignment with IEA Net Zero Emissions by 2050 scenario — which effectively requires PACTA-consistent production plan assessment for covered sectors.
SFDR PAI reporting: While SFDR doesn't mandate specific Paris alignment tools, PAI indicator reporting creates data (GHG intensity, fossil fuel exposure) that feeds into alignment assessment.
TCFD Scenario Analysis: TCFD recommendations for scenario analysis are consistent with Paris alignment tool outputs — climate scenario analysis and portfolio-level temperature alignment are both TCFD-endorsed approaches.
NZAMI and NZAOA protocols: Net-zero commitments under NZAMI and NZAOA require annual portfolio alignment reporting, for which ITR and PACTA outputs are commonly used.
Real-world examples
CalPERS PACTA analysis: CalPERS has used PACTA to assess the alignment of its listed equity and corporate credit portfolios with IEA climate scenarios. PACTA results have informed CalPERS's engagement priorities — specifically which oil and gas and power sector holdings have production plans most misaligned with transition scenarios.
LGPS Central TPI integration: The Local Government Pension Scheme Central pool in the UK adopted TPI management quality scores as a key climate governance metric, using scores to benchmark engagement progress and make investment decisions in listed equities.
BlackRock Temperature Alignment reporting: BlackRock has reported portfolio ITR for several of its ESG fund ranges, providing clients with portfolio-level temperature alignment information alongside conventional financial performance data.
Common mistakes
Treating ITR as a direct prediction of warming: A portfolio ITR of 2.3°C does not mean the planet will warm 2.3°C — it means the portfolio's emission trajectory is consistent with that level if all companies globally followed the same trajectory. It is a relative alignment metric, not a climate prediction.
Using only one tool for Paris alignment assessment: Each tool captures different dimensions of alignment and has different strengths and gaps. Relying solely on ITR (which is heavily influenced by stated targets) may miss PACTA misalignment in production plans. Using only PACTA misses management quality and target commitment data from TPI.
FAQ
Is PACTA free to use?
Yes. PACTA is developed and maintained by the 2° Investing Initiative (2DII) and is available free for investors and financial regulators at transitionmonitor.com. The 2DII's mission is to align financial markets with Paris goals, and free access to PACTA is central to that mission. Commercial implementations of PACTA methodologies are also offered by some data providers.
How do these tools handle forward-looking data?
All three tools use some combination of backward-looking (historical emission data) and forward-looking (stated targets, planned production capacity) data. PACTA uses forward production plans from commercial asset-level databases. TPI uses stated targets for its emission performance assessment. ITR uses stated targets and historical trends for trajectory calculation. Forward-looking data is inherently less certain than backward-looking data, introducing uncertainty that should be acknowledged in any Paris alignment assessment.
Related concepts
Summary
PACTA (physical production plans vs. IEA scenarios), TPI (management quality and emission performance), and MSCI Implied Temperature Rise (target-based portfolio temperature in °C) are the three primary Paris alignment tools for portfolio assessment. They use different inputs and methodologies, producing complementary outputs: PACTA is best for sector-specific production plan analysis; TPI for engagement priority identification and governance quality assessment; ITR for portfolio temperature reporting and comparison. All three face limitations including Scope 3 data quality constraints, scenario assumption uncertainty, and the distinction between portfolio metrics and real-world emission outcomes. Regulatory requirements for scenario analysis (TCFD, SFDR, EU PAB) and institutional net-zero commitments (NZAMI, NZAOA) drive increasing use of these tools in institutional investment management.