It’s an adjective
It’s coordinated with an adjective, “neutral”. This suggests it is also an adjective, although I don’t know if this is really strong evidence.
What you can call it in addition to that depends on how you answer two tricky questions about grammar.
Can a word simultaneously be a participle and an adjective?
It’s actually disputable whether adjectives like this are “participles”, strictly speaking.
The mainstream view is that a participle is a verbal form—in other words, that even though a participle behaves a lot like an adjective, it isn’t an adjective. This view is based on the fact that -ing words that behave like adjectives can actually used in two mutually exclusive constructions that behave in slightly diferent ways:
Some adjective-like -ing words can take direct objects and can take adverbs that normally only modify verbs, but cannot be used in constructions that require a gradable adjective.
Example: “He is painting.”
We can add a direct object and the verb-modifying adverb “carefully”:
“He is carefully painting a picture.”
We cannot add the adjective-specific adverb “very”:
“*He is very painting” is incorrect.
Other adjective-like -ing words cannot take direct objects or verb-specific adverbs, but can be used in constructions that require a gradable adjective.
Example: “That’s exciting!”
We cannot add a direct object or the verb-modifying adverb “carefully”:
“*That’s exciting me!” is incorrect. (Technically, this is grammatically possible, but it changes the meaning of “excited” by forcing it to be interpreted as an -ing word of category (1).)
“*That’s carefully exciting!” is incorrect.
We can add the adverb “very”, which is used with gradable adjectives:
“That’s very exciting!”
As I mentioned with regard to “exciting”, sometimes (actually, often) an -ing word might be able to be used in either way, but it can’t be used in both ways at the same time. While “That’s exciting me” is technically grammatical (although not idiomatic), it is absolutely ungrammatical to say something like “*That’s very exciting me”.
The mainstream viewpoint is that -ing words in class (1) are (inflected forms of) verbs (and therefore classified as “participles”) while -ing words in class (2) are lexically derived adjectives, and therefore not truly participles according to most classification schemes. The words in class (2) may be called something like “participial adjectives”.
However, traditional or just more generalized terminology may use the word “participle” to encompass adjective-like -ing words of both category (1) and category (2).
Also, there are non-mainstream analyses of participles that consider all of them to be adjectives, even the ones that mainstream grammar classifies as verbs. In these analyses, the words in class (1) and (2) might both be called participles.
Can a word simultaneously be a participle and a gerund?
Another disputed point is whether “participle” is a distinct category from “gerund”.
Both are always identical in form (the -ing form). The only possible way to distinguish them is the context in which they are used. And sometimes even this does not clearly distinguish them.
While in the past, some writers have used “gerund” as an overarching category, the cover term I see most often in modern grammatical descriptions is “gerund-participle”, which I believe was introduced in Huddleston and Pullum’s Cambridge Grammar of the English Language.
Huddleston and Pullum do however reserve “gerund-participle” to refer to -ing words that are verbs. This means that, if you agree that “distorting” is an adjective, it would not qualify as a “gerund-participle” in the terms of Huddleston and Pullum.
So “adjective” or “participle” is probably the best description
So, as BillJ said, “adjective” is probably the best term to describe this use of “distorting”. “Participle” is also understandable, although it might be technically incorrect in terminological systems that require a participle to be a verb rather than an adjective. “Gerund” is not a very good way to describe this.
Why “distortion” would be wrong
As for why “distorting” is used rather than “distortion”, it’s because “distortion” is a noun that isn’t as specific in meaning. A “distorting medium” pretty clearly means “a medium that distorts”. A “distortion medium” would just mean “a medium related in some way to distortion”. It would be a vague and possibly confusing term.
Another reason is the first fact I brought up: the word “distorting” is coordinated with the adjective “neutral”. It would be awkward (maybe even ungrammatical) to coordinate a noun with an adjective. “A distortion—not a neutral—medium” sounds wrong, and looks like it might be a mistyped version of “a distortion—not a neutral medium”.