The Transition Disruption Metric (TDM) is based in the IPR 2021 Forecast Policy Scenario (FPS) scenario developed by the Inevitable Policy Response (IPR)
The TDM metric is complementary to the PACTA alignment model and provides a score of the medium-term potential disruption of the portfolio under the IPR transition scenarios. The higher the metric, the higher the disruption.
The score is a measurement of speed and progress benchmarked against the FPS scenario and captures the non-linearity and more medium-term disruption of the climate transition. The metric creates a quantitative score of the potential disruption by 2030 based on how far the portfolio lags / leads the FPS scenario in the first 5 years. The indicator will be available at technology, and portfolio level, subject to scenario and data availability.
It effectively measures how much you have left to do relative to how much time you have left. In this way, it’s a progress indicator tracking disruption.
Here is how it works using the example of writing a one page letter in one hour, where we track progress / disruption:
- If you wrote the letter in 30 minutes, your disruption is 0. Your work is done.
- If you wrote half the letter in 30 minutes, your disruption is 1. You are on track to finish the letter.
- If you wrote only a quarter of a page in 30 minutes, your disruption is 1.5. You are significantly behind finish the letter and need to accelerate. We consider that anything above 1.5 (anything less than the quarter of the work done after half the time spent) involves significant disruption.
That same principle is applied to the evolution of the capital stock by portfolio companies. That is the TDM!
The metric measures the adjustments needed in the portfolio from year 6 to 10 relative to portfolio’s pace in the first 5 years (2021-2025), in order to be in line with the FPS scenario by the end of 2030.
The higher the number, the higher the likely portfolio disruption in the medium-term.
If investors want a smooth transition to the scenario, they should start adjusting or engaging with companies at a faster or slower pace according to their results.
The metric creates a quantitative measurement of potential disruption based on how far the portfolio lags / leads the FPS scenario in the first 5 years. The indicator will be available at technology, and portfolio level, subject to scenario and data availability.
What does it look like in practice?
- Full mitigation (0): The portfolio has fully mitigated the FPS transition disruption modelled until 2030.
- Managed mitigation (from 0 to 1): The portfolio is ahead or on track (when the value is 1) to fully mitigate the FPS transition disruption by 2030.
- Managed disruption (1 to 1.5): The portfolio has not fully mitigated the FPS transition disruption by 2030, but the residual disruption can be ‘managed’.
- Unmanaged or high disruption (over 1.5): A score over 1.5 suggest an increased unmanaged or high disruption, where the portfolio significantly lags in the mitigation of the FPS transition disruption by 2030. The acceleration of the pace of the capital stock evolution must be much higher than in the first five years.
Why is the TDM unique?
The Transition Disruption Metric (TDM) is the first metric that seeks to capture the medium-term disruption. It fills the gap between 5 year alignment metrics (e.g. PACTA) and long-term risk projections (e.g. 2040 / 2050 stress-tests).
The TDM is a simple and intuitive score that can be easily interpreted. It grades on a curve the disruption from zero disruption to +1.5 and beyond.
It is the first metric specifically designed for the IPR toolbox that captures the disruption embedded in the non-linearity of the transition. It explicitly takes a non-linear view as to how disruption materializes and can capture the non-linearity of the transition across key climate technologies and products.
TDM is a free and open-source metric developed in collaboration between 2DII and IPR and available on Transition Monitor.
It acts as both a portfolio and sector metric using the same calculation rules, allowing for both portfolio management use case and sector specific applications.
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IPR and PACTA - The new Transition Disruption Metric