Climate investors see growing opportunities in water tech

If challenges go hand-in-hand with opportunities, water should be a prime focus for investors.

One quarter of the world’s population lives in countries facing extreme water stress — that is, using 80 per cent of their supply annually. Climate change will put supplies under still greater strain.

Governments trying to deliver “clean water and sanitation” — the sixth of the UN’s Sustainable Development Goals — face huge funding gaps. Estimates for the investments needed globally for water-related infrastructure range from $6.7tn by 2030 to $22.6tn by 2050.

In principle, all that should create openings for innovative businesses and their backers. In practice, however, it has been tough attracting financing to what is a slow-moving, highly regulated sector — and one based around a resource for which, many argue, large companies and agribusinesses are paying too low a price.

“It’s unfortunately only a small part of climate finance and can often be an afterthought for clean tech funds,” says Ari Raivetz, who has worked for almost two decades as a venture capitalist and senior executive in the water and wastewater recycling sectors.

A number of barriers hamper the flow of private funding into water tech. As well as water’s unrealistic pricing, there are few large-scale investment opportunities: the water tech sector has just one billion-dollar start-up, or unicorn — Boston-based Gradiant — while, in climate tech, the world’s top 20 unicorns alone were valued at more than $140bn in early 2024, according to Statista.

“It’s a bit of a chicken-and-egg problem,” says Namratha Kothapalli, a principal and part of the climate tech and industrial tech team at European venture capital fund Speedinvest. “Investors need to see more start-ups that can grow and scale.” And, of course, without funding, this cannot happen.

Raivetz points to other obstacles: long timelines from design to procurement and construction, and an approach that tends to be reactive: fixing and maintaining failing systems.

“We’re constantly chasing our tail,” says Raivetz who, in 2019, founded Transcend, which creates software to help plan and design infrastructure for water and other sectors.

However, the increased incidence and severity of droughts, and a growing awareness of the links between water and climate change, are now pushing water on to the radar of entrepreneurs and investors. It was for this reason that New York-based FoodShot Global — a network of banks, companies and investors backing start-ups developing technology for sustainable food systems — made water conservation its annual focus area last year.

Companies are maturing and have the potential for successful exits. And new funds are popping up that are focused on water solutions

Other developments, too, gave water investment new salience in 2023. In May, technology group Xylem completed a $7.5bn acquisition of Pittsburgh-based water treatment company Evoqua. That same month, water tech’s solitary unicorn emerged, when Gradiant, which has developed new ways of treating industrial wastewater, achieved a $1bn valuation.

“Companies are maturing and have the potential for successful exits,” says Danya Hakeem, vice-president of portfolio at Elemental Excelerator, a Hawaii-based non-profit investor in climate tech. “And new funds are popping up that are focused on water solutions.”

The water-climate nexus is also attracting government funding. In the US, for example, part of the Biden administration’s $27bn Greenhouse Gas Reduction Fund is available for clean water infrastructure projects and technologies. “One of the requirements for deploying those dollars is that they mobilise private capital,” says Hakeem.

Many of the start-ups successfully raising funding are addressing the impact of agricultural and industrial pollution on the water supply. “A lot of people are using our software for designing water recycling facilities,” explains Raivetz.

And start-ups are often taking a circular economy approach by turning the contaminants they remove from water into new raw materials. “It’s closing the loop on water usage,” says Kothapalli.

Raivetz points to the algae-based technology that Iowa-based Gross-Wen Technologies has developed to treat wastewater and recover nutrients from it that can be used in fertiliser.

Elemental’s portfolio includes companies taking a similar approach. Massachusetts-based Cambrian Innovation, for example, has developed an “EcoVolt Reactor” that uses microbes to produce clean water and biogas from wastewater. Matter, from Bristol in the UK, has a technology that filters microplastics from wastewater, for recycling.

Investments in water start-ups remain small: an estimated $470mn in 2021, according to GWI WaterData, compared with almost $27bn for climate tech in the first half of 2022.

Hakeem believes this will change, though. She compares the shift to solar power’s early days. “It was hard to invest — people had to figure out the best place in the market and the right way to back these solutions,” she says. “But they did, and I think they will in water, too.”

Climate Capital

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