Lex Hall: Hi, I'm Lex Hall for Morningstar. Today, I'm joined by Kate Howitt who oversees Fidelity's Australian Opportunities Fund. She is here today to examine a few key holdings and what she sees for them in the future.

Welcome, again, Kate to Morningstar.

Kate Howitt: Thank you.

Hall: Now, the first name on the list is an Australian company and a leader in ESG, has become somewhat of a leader in ESG and that's Macquarie Group. Tell us why that holds such an integral part in your fund.

Howitt: So, we think Macquarie is a fascinating business. They've obviously had a very, very strong track record from their founding a couple of decades ago and their growth throughout Australia and now around the world. What's interesting to us is they have grown beyond their kind of narrow roots of broking and investment banking into funds management. But increasingly, they are positioning themselves for what will be the biggest opportunity in financial services of the coming decades and that is the need to mobilise capital to decarbonise. Now, estimates are that we will need to deploy somewhere between US$100 trillion and US$150 trillion over the next couple of decades. Now, in context, the US economy is about $21 trillion. So, that's saying that at some point over the next 30 years, we need to take five to seven of those years, and not do anything else in America except invest to decarbonise. That is the scale of it is, absolutely enormous.

Now, Macquarie have identified the fact that there is a role for a financial intermediary. And so, they have been hiring subject experts because if they can understand the physics and the engineering and the execution and implementation of all the different technologies, then they will be best placed to advise and they will advise on the producers, on the consumers, on the developers, the project managers, the government parties. They can be well-placed to position themselves anywhere in all of that mobilisation of capital. So, it's kind of a picks and shovels play on ESG. They're not going to be developing new green technologies themselves, but they will be supporting and enabling hundreds of companies around the world and all of their clients and customers who want to do that. So, we think that that is a longer-term theme.

Hall: I heard you say—just on that note, I heard you say in a previous interview that it depends on turning circle brown companies into green companies. And by that I think you mean turning, let's say, for example, a manufacturer of conventional cars and you help them turn into makers of electric cars, because they've already got some of the infrastructure that will allow them to do that. Am I on the right track there?

Howitt: Yeah, look, absolutely. The whole trick for the world is to keep the bill closer to US$100 trillion rather than US$150 trillion. And so, we'd have to be efficient about this. And so, I personally think it's a mistake to go into ESG investing from an exclusionary basis. Because we need companies who are today 100 per cent brown but able to help the world go green. For example, locally listed Santos, currently, every dollar of their revenue comes from selling carbon. That's obviously not a future proof strategy. But they also through an accident of history happen to be one of the leading operators of carbon capture and underground storage already. And so, they will be able to use that to then ramp up hydrogen production, ammonia production, and help with decarbonisation of a lot of other industries. We should be supporting that, not penalising them.

Hall: Would you support a company like Whitehaven Coal, therefore?

Howitt: Well, if they could show that they had a viable path to taking their cash flows to decarbonising and contributing to taking carbon out of the atmosphere, then we'd look at it.

Hall: Okay. Second name on the list is Evolution Mining. Tell us why that's in the frame for you.

Howitt: Yeah. So, you can look at it in two parts. Firstly, Evolution is a gold mining company. So, you can have all of the macro concerns around government's excess spending, excess debt, how are they going to deal with that risk of inflation. So, you can make a pretty good macro case that you want to have some real assets or some assets, hard assets that will hold up under an inflationary environment and in which case, you'd want to own some gold, particularly in the Australian context, and Evolution is a great option.

You can forget all about that and just think of it as a cash generating business. Where the Aussie gold price is and their cost base is, they generate a lot of cash and they've been very good capital allocators through time of giving that cash back to shareholders rather than just using it to overpay to grow the business. So, even without a gold view, you can like that company.

Hall: Okay, great. All right. And the final name again a miner and we alluded to this in a previous video, Nickel Mines.

Howitt: Nickel Mines is a really interesting business. They are partners with a Chinese privately-owned company called Tsingshan, who operate the world's largest nickel laterites operation out of Indonesia. Now, Nickel Mines are not the operator. They are joint venture partners, and they assist with funding. And so, it's a really unique opportunity for Australian investors to kind of go along for the ride as Tsingshan expands that operation. Now, it gets really interesting on the ESG front. On the positive, we need massive new supply of nickel if we're going to build the batteries we need to decarbonise. However, nickel laterite production historically has been incredibly carbon intensive. So, net-net, are you really helping the planet? Tsingshan has committed to do aggressive new implementations of solar energy generation that will help to mitigate that. So, whilst we're excited about the carbon opportunity, we also are very much watching to make sure that the company makes good on these goals that they've set because we do want to see a net benefit to the planet from this operation.