THE upcoming 26th UN Climate Change Conference in Glasgow, known as COP26, will mark 5 years since much of the world signed the Paris Agreement and set historic carbon reduction targets. The Paris Agreement signatories agreed to update their targets in 5 years, making COP26 in November a crucial deadline for more aggressive action. COP26 will be a significant milestone for the transition to a sustainable future. COP26 is the world's last chance to get onto the net zero emissions trajectory by 2030 and keep temperature rises below 1.5 deg C, in line with the Paris Agreement.

The task has been made more urgent by the recent UN Intergovernmental Panel on Climate Change (IPCC) report showing scientific evidence of human-induced climate change and the large number of record-breaking extreme weather events of late. The challenges are huge, given the scale of the task and the backdrop of the pandemic.

The G-7 group of nations have committed to reach net zero emissions no later than 2050 and to halve its collective emissions in 2030. G-7 leaders also said they would submit new reduction targets, known as Nationally Determined Contributions (NDCs), "as soon as possible" ahead of COP26.

The last negotiations, COP25 (in 2019), resulted in a number of outstanding issues that could be detrimental to climate ambitions if left unresolved. There are three signposts every investor should watch for the success or failure of COP26.

SIGNPOSTS FOR SUCCESS

1) Ambitious targets backed by delivery plans: The last 6 months have seen an increase in ambition from several countries, with two-thirds of the global economy now covered by net-zero targets and a number of nations increasing the scope of their 2030 targets. But those targets - particularly for the next decade - are not yet ambitious enough, and are not supported by delivery plans that give investors and businesses the confidence and clarity they need. The question remains of how long these time frames should be, and the task at COP26 will be to decide on the starting point and duration of their climate pledges.

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2) Carbon trading to become mainstream: The finalisation of Article 6, which covers the cooperation of global economies' implementation of climate pledges and international carbon emission trading, will be a key success marker of COP26. At the heart of Article 6, carbon emissions saved or avoided in one economy can, through a credit system, be used by others to meet their own targets. But that requires definitions of who can sell how much of what and to whom, and when. Therefore, a monitoring body and an accounting system must be established.

3) Finance to play a pivotal role: Finance is a key part of all climate negotiations and often used as a leveraging tool. As part of COP21, developed countries agreed to provide US$100 billion a year by 2020 and through 2025 to developing nations for climate action. This has yet to be met. If this challenge is not addressed, it will be difficult to tackle the climate crisis globally, making pledges on emissions reductions and transparency more problematic to realise. At COP26, the higher-income countries need not only to meet that target; they must support their lower-income counterparts in establishing pathways to decarbonisation that cut emissions globally.

GREATEST THREAT ALSO GREATEST OPPORTUNITY

A successful COP26 can accelerate climate policies to radically reduce emissions. The transformation is going to create a huge historic investment opportunity. This is going to take a lot of capital investment to make all these changes happen.

Limiting warming to 2 deg C by 2050 will require US$3 trillion annually in investment, according to estimates by the IPCC. That means annual investment in low-carbon energy technologies and energy efficiency needs to be increased by roughly 5 times compared to 2015 levels by 2050. Financing for climate-related projects is growing rapidly. Global issuance of green bonds - debt that funds projects like solar power or wind farms - surged in the first half of 2021 to more than US$200 billion.

Global emissions declined by 6.5 per cent in 2020 because of the global pandemic, and the world needs to reduce emissions annually by 7 per cent until 2050. Energy, food, transportation and industrial systems would need to be drastically overhauled in order to become net-zero.

We see emergent technologies in the following areas:

1) Acceleration of energy transition: Countries have focused on reducing emissions through encouraging the replacement of fossil fuels in power generation. Policy ambition has been an effective tool to help with this transition as well as the improving costs behind to produce clean power generation. Low-carbon power generation deployed at scale in many countries include nuclear, hydroelectric, geothermal, solar and wind. Turning targets into reality will take a combination of policy measures and billions of dollars in spending, which could create opportunities for investors and companies.

2) Improvement in carbon capture technologies: Carbon capture technology will be one of the key innovations in the fight against global warming. It can offer a potential 90 per cent reduction in carbon dioxide by capturing emissions before they reach the atmosphere and is key for the global energy system to reach "net zero" emissions. However, the technology currently captures less than 0.5 per cent of global energy-related emissions. US President Joe Biden's US$2 trillion infrastructure proposal allocates US$35 billion for investment in carbon-reducing technologies. Hence, there is significant scope to scale up but this will require more policy support, and more technological advancement.

3) Greater energy efficiency for smart cities: With cities consuming over two-thirds of the world's energy, there is immense pressure to transition to lower-carbon energy systems. Investment in smart technology can speed the transition, especially in smart grids, next-generation energy transmission, and distribution networks that can automatically monitor energy flows and adjust to changes in supply and demand accordingly. Smart city solutions will enable the circular economy which consists of extending the life of products, reducing waste, reusing waste as a new resource and developing the principles of leasing and sharing.

IMPLICATIONS FOR INVESTORS AND BUSINESSES

The widely anticipated COP26 will see more parties of the Paris Agreement finalise climate action plans. These in turn have highlighted the need from investors and companies for policymakers to take more action, thereby creating visibility on longer-term climate mitigation and adaptation policies.

Businesses should adopt adaptation strategies to enhance the resilience of their supply chains and infrastructure, with a focus on water and food security, prevention of weather-related economic losses, or protecting lives. The need to adapt to climate change will be mainstream and adopted by leading corporations.

A successful COP26 will result in an acceleration of climate policies - unleashing incentives for investment to reduce emissions as well as build resilience. Investors should be aware of key emergent technologies that will benefit from this transition, including energy transition, carbon capture technologies, and smart cities solutions.

• The writer is chief investment officer, South-east Asia, HSBC Global Private Banking and Wealth.