It's not actually monitoring the motor temperature without a sensor, it's just estimating the motor's relative thermal state based on the power it pushes into it. The VFD "knows" roughly how efficiently the motor is operating at all times (because the voltage and current waveforms contain information that can be used to calculate efficiency), it knows how much power the motor consumes, and if you program the motor frame size correctly then the VFD knows approximately how much heat the motor can dissipate. Based on all this information, the VFD estimates the motor's temperature rise. It's not perfectly accurate, but it's more accurate than the old fashioned heater-based overload protection.