The Role of ESG in Driving Sustainable Innovation in Water Sector: From Gaps to Governance

Abstract

The water sector is facing a convergence of systemic challenges generated by climate change, increasing demand, and increasingly stringent regulations, which threaten its operational and strategic sustainability. In this context, the article examines how ESG (environmental, social, governance) principles are integrated into the governance, financing, and management of water resources, with a comparative focus on Romania and the European Union. It aims to assess the extent to which ESG practices contribute to the sustainable transformation of the water sector in the face of growing environmental and socio-economic challenges. The methodology is based on a systematic analysis of policy documents, regulatory frameworks, and ESG standards applicable to the water sector at both national (Romania) and EU levels. This study also investigates investment strategies and their alignment with the EU Taxonomy for Sustainable Activities, enabling a comparative perspective on implementation, gaps and strengths. Findings reveal that while ESG principles are increasingly recognized across Europe, their implementation remains uneven (particularly in Romania) due to unclear standards, limited funding mechanisms, and fragmented policy coordination. ESG integration shows clear potential to foster innovation, improve governance transparency, and support long-term resilience in the water sector. These results underline the need for coherent, integrated policies and stronger institutional coordination to ensure consistent ESG adoption across Member States. Policymakers should prioritize the development of clear guidelines and supportive funding instruments to accelerate sustainable outcomes. The originality of our study lies in its comparative approach, offering an in-depth analysis of ESG integration in the water sector across different governance contexts. It provides valuable insights for advancing policy coherence, investment alignment, and sustainable water resource management at both national and European levels.

1. Introduction

As a fundamental resource underpinning both ecological balance and human development, water holds an indispensable role in sustaining life. Despite its critical importance, the intrinsic value and multifaceted utility of water are often underestimated or overlooked in both public discourse and policy frameworks. From the growth and development of agriculture to the survival of ecosystems, including humans, water supports growth, development, mineralization, and diversification; it facilitates not only physical growth and metabolic function in living organisms, but also broader processes of mineralization, diversification, and ecological interdependence, making it a cornerstone of planetary viability being an essential element of life on the planet [1,2,3].

Access to clean water, as emphasized by Sustainable Development Goal 6, is essential for achieving sustainable development [4]. The current context of climate change and unbalanced lifestyles, accentuated by high levels of pollution, is fueling concerns about water resources at an accelerated pace [1,2,5]. This is all the more prominent as the amount of water consumed annually, globally, exceeds 5000 km³ of fresh water, according to data from the past 50 years [6]. According to recent studies, it has been estimated that the industrial sector alone consumes 20% of all fresh water. Globally, of this percentage, a significant portion is consumed for energy production (75%), and the rest is redirected for production (25%) [7,8]. For instance, in a Eurostat report addressing issues related to the degree of water scarcity, the water exploitation index was evaluated in order to understand the level of water scarcity. This was achieved by measuring the total water consumption (from available renewable freshwater resources) at the level of European countries, for the period 2022 (Figure 1) [9].

Pressure on natural resources, and especially on freshwater supplies (Figure 2), is increasing because of urbanization and agricultural practices as well as rapid industrialization in developing countries. For instance, in Africa, industrial demand is expected to increase by up to 800% by 2050 [10]. Variations and fluctuations in demand are also significant and increasing in other continents, especially in Asia, Europe, and North America [7]. Given the fact that the food industry is the largest consumer of water, statistical calculations indicate that by the same date (2050), the industry will have to cope with a demand of up to 60%, an aspect that amplifies the pressure in the use of resources and the increase in water consumption [11,12].

As a result, water resources are under increased pressure due to environmental changes such as droughts, pollution events, and land-use changes [13].

Humanitarian concerns (e.g., climate change, geopolitical conflicts, public health crises, and sustainability issues), are globally recognized, prompting the creation of development strategies aimed at implementing rules and policies promoting social responsibility for sustainable development. ESG frameworks have gained prominence as normative and operational tools that guide the transition toward sustainable economic models. ESG policies provide actionable guidelines for enabling a just and effective transition to a green economy. By encouraging socially responsible corporate behavior and strategic foresight, ESG standards aim to mitigate systemic market risks, foster transparency, and enhance long-term value creation across industries [14,15,16].

The integration of ESG principles (environmental protection and management of natural resources, respect for human rights, good working conditions, positive social impact, and transparent, accountable, and ethical governance) fosters a paradigm shift in how water is perceived and managed, not merely as a commodity, but as a shared, finite resource that must be preserved through collective responsibility and strategic foresight. By embedding sustainability at the core of their operations, actors in the water sector can enhance resilience, drive innovation, and contribute meaningfully to the transition toward a more equitable and environmentally-friendly global economy [3,4,17].

Although notable progress has been achieved in sectors such as energy, finance, and transport, where ESG integration has become increasingly institutionalized, the water sector remains in a formative stage of ESG adoption. Efforts to embed ESG principles into the core of operational, investment, and governance models within the water sector have been uneven, reflecting a range of structural, regulatory, and financial constraints. Nevertheless, this sector is uniquely positioned at the intersection of environmental stewardship and human development, making it an essential domain for ESG-driven innovation [18,19]. At the same time, the European Union’s sustainable finance regulations, particularly the EU Taxonomy, create both a challenge and an opportunity; they push for greater accountability and alignment with climate and environmental goals but require clear metrics, standardization, and systemic change [20].

In the context of the increasingly accentuated climate crisis, the degradation of natural resources and the increasing pressure exerted by the European regulatory framework, the water sector is undergoing a profound transformation, being forced to rethink its traditional governance, financing and operating models. ESG principles are becoming, in this context, increasingly frequently invoked as key tools for promoting sustainability and innovation in this critical sector, but their implementation remains fragmented and uneven at European level. This situation is more visible in the case of Romania, where institutional gaps, lack of strategic investments and insufficiently integrated policies considerably limit the potential of ESG to act as a driver of the green transition.

This paper aims to investigate how ESG principles are applied in the assessment and transformation of the water sector, in a comparative perspective between Romania and the European Union Member States. The analysis highlights both the good practices from other European countries, as well as the persistent blockages in the Romanian context, with the aim of understanding to what extent the alignment with the policy instruments of the European Union (such as the Taxonomy for Sustainable Activities) can contribute to reducing systemic vulnerabilities and increasing the performance of the water sector. The study is based on a critical synthesis of the specialized literature, public policy documents and relevant ESG standards, correlated with a systematic analysis of the legislative and institutional framework in Romania and the EU, with a focus on governance, investment and social impact. Through this approach, the article raises the following essential question for the sustainable future of water resources: to what extent can ESG principles become a real catalyst for innovation and strategic cohesion in the water sector, especially in European economies still in transition, such as Romania? At the same time, this paper contributes to a better understanding of the mechanisms through which alignment with European environmental and sustainability objectives can be accelerated, highlighting the need for coherent policies, a clear regulatory framework, and more effective coordination between public and private actors involved in the management and protection of water resources.

2. Materials and Methods

To obtain a clear and comprehensive picture of how the water sector influences economic sustainability, we conducted a literature review. The central point of the methodology stage was the query of the Web of Science database, one of the most comprehensive databases in terms of sustainability and circular economy. The preliminary query involved a topic search that integrated the title, abstract, and keywords. The search terms employed included the combination of the keywords “water industry” AND “sustainable economy”. This yielded a total of 3578 documents.

Subsequently, we filtered the articles based on the year of publication (more precisely, from the past two-and-a-half years: 2023–May 2025), the language of publication (English), open access, and the type of publication (articles and review articles). Following a meticulous review of publication titles and the selection of pertinent articles, a total of 707 articles were incorporated into the VOSviewer software (version 1.6.20) for keyword analysis, selecting the minimum number of keyword co-occurrences as 2. Thus, out of the total number of 415 keywords, 58 met the threshold (Figure 3).

For a more in-depth analysis of the context, we refined the search by completing it with the key term or “Environmental, Social, Governance principles” or “sustainable development”. This operation brought us a total of 234 publications that were analyzed to study the current state of implementation of ESG factors in the transition to sustainability in the water sector. After analyzing the relevance of these articles, carried out by analyzing the abstract, keywords, and impact factor (IF > 4), we selected 38 articles for a more detailed analysis of the aspects congruent with the purpose of this paper (Figure 4).

Following a detailed analysis of this collection of articles, the relevant information, in the context of adopting sustainable strategies in supporting and developing the water sector in relation to ESG factors, was structured into elements corresponding to a context and content analysis. Regarding the context analysis, the relevant aspects were structured according to the spatial and temporal findings regarding the implementation of ESG policies in the water sector. Meanwhile, aspects regarding progress, gaps, improvements, and factors related to EU taxonomic policies were structured in the content analysis (Figure 4).

3. Results

3.1. Context Analysis

Sustainability concepts are frequently addressed, but their applicability in the water sector, in close dependence with the regulatory factors introduced by ESG, represents a holistic vision in transition towards a sustainable industry. The selected articles offer a comprehensive view of the current state and the progress made, but also of the gaps that the industrial system currently faces in implementing and aligning with the taxonomic policies of the European Union.

The temporal criteria addressed in the contextual analysis illustrate an extremely high tendency for analysis of the water sector situation, especially during the past two-and-a-half years (2023–May 2025). As can be seen from Figure 5A, the number of publications on this topic is very large, which is evident even in the high number of articles published in the first 5 months of this year.

Regarding the spatial component of the contextual analysis, as seen in Figure 5B, the diversity and ubiquity is overwhelming. This relevant aspect is evidence of attempts to reform and improve structures and concepts to support the transition towards a water sector aligned with policies and practices that favor sustainability and responsibility and encourage the protection of the environment, ecosystems, people, and life on the planet.

Table 1. Water Exploitation Index (WEI+)—Top 10 EU Hot-Spot Countries.

Rank	Member State	WEI+ % (2022)	10-yr Trend (%-Points)	Primary Stress Driver
1	Malta	110.3%	▲ +5.1	Tourism + desalination energy demand
2	Cyprus	73.4	▲ +4.2	Irrigated citrus and olives
3	Spain	41.2	▼ −1.3	Agriculture, drought frequency
4	Greece	39.7	▲ +2.9	Summer tourism, hydropower
5	Italy	32.4	▲ +1.8	Po Basin irrigation
6	Portugal	31.1	▼ −0.6	Almond and olive expansion
7	Belgium	29.6	▲ +0.9	Industrial clusters (Flanders)
8	Romania	26.8	▲ +2.2	Leakage + ageing networks
9	Germany	22.7	▲ +0.4	Navigation, thermal cooling
10	France	21.9	▼ −1.1	Agriculture; improved reuse

Note: values > 40% = “severe scarcity”.

illustrates the water exploitation index in the top 10 European countries, ranked according to water deficit [21].

3.2. Content Analysis

As the urgency for climate resilience and sustainable resource management intensifies, the water sector finds itself under growing pressure to integrate environmental, social, and governance (ESG) principles into its core strategies. This integration is not only a response to regulatory and societal expectations, but also a powerful enabler of sustainable innovation, fueling the development of smart water systems, circular solutions, and inclusive operational models. However, while progress is evident in various pilot projects and corporate initiatives, the broader implementation of ESG remains inconsistent, limited by gaps in standardization, funding access, and policy coordination. These gaps highlight the need for a more unified framework that can bridge innovation with accountability. In this regard, the alignment of water-sector practices with the EU’s sustainable finance agenda, especially the EU Taxonomy and accompanying legislation, plays a pivotal role. As can be seen from Figure 6, data empirically demonstrate that ESG disclosure is not a simple “checking of boxes” but correlates with concrete indicators of efficiency.

The following sections explore these interrelated dynamics, beginning with the opportunities and progress achieved through ESG-driven innovation, followed by a critical look at existing barriers and the policy mechanisms designed to overcome them.

3.2.1. ESG in the Water Sector

The global water sector is under increasing pressure (e.g., climate change, population growth, rapid urbanization, aging infrastructure) to adapt to a complex web of environmental, regulatory, and socioeconomic challenges. Within this context, ESG frameworks have emerged as powerful tool for change, shaping investment flows, influencing regulatory compliance, and guiding corporate strategy toward long-term value creation [24,25,26,27] (Figure 7).

Environmental performance is at the forefront of the water sector’s ESG initiatives, focusing on reducing water consumption, improving wastewater treatment, enhancing ecosystem protection, and lowering greenhouse gas emissions associated with water management systems. Social criteria emphasize equitable access to water services, community engagement, and the protection of human rights in water-stressed regions. Governance-related aspects include transparency in water risk disclosures, responsible resource stewardship, and board-level accountability in managing environmental and social risks [28]. ESG implementation in the water sector is also closely tied to innovation. Companies and utilities are increasingly leveraging technologies such as smart metering, AI-driven leakage detection, membrane filtration, and internet of things (IoT)-based monitoring to optimize water use and demonstrate ESG performance [22,29]. At the same time, pressure from financial markets and ESG rating agencies has created incentives for water-related businesses to adopt science-based targets and sustainability reporting frameworks aligned with global standards such as the Global Reporting Initiative (GRI), the customer data platform (CDP) water program, and the EU Taxonomy for Sustainable Activities [30].

The research conducted to date has focused on exploring the impact of ESG performance in research, development, production, and innovation, and few studies have focused on the impact of these factors on the novelty of innovation. A study focused on ESG performance extended the research on the economic implications of these factors by shifting the focus to the quality of innovation behavior of enterprises [14]. The authors of this study found that the relationship between the latter and ESG performance has attracted particular attention in recent years [14]. According to the data collected, they were able to state that ESG performance is able to promote the novelty of innovation by expanding resources. The investment behaviors of corporations have begun to be a central aspect for investors as a result of the increase in the demands for sustainable development. Therefore, ESG initiatives strengthen social responsibility, facilitate high-quality development, and respond to demand for increased sustainability [14,25].

In the sphere of companies and enterprises, the incorporation of ESG principles in China, for instance, has proven to be a factor that stimulates green corporate innovation by utilizing internal and external resources and also by establishing sustainable directions in deepening development [31]. China, one of the largest developing countries, is facing a huge water deficit; the agricultural sector alone consumes up to 62% of the total amount of water in the entire country. As a result of the fact that the agricultural sector is the largest consumer, it was the first targeted for the adoption of reform and restructuring strategies [32].

An early measure was the adoption of a reform of agricultural water prices with the aim of exploring and sustainably managing water. The results of the reform were limited, which is why Zhang and Oki [33] analyzed water management schemes in agriculture with the aim of analyzing pricing mechanisms in relation to legal and institutional frameworks, and also regarding obstacles, in developed and developing countries [33]. Their study highlighted the importance of establishing well-defined pricing mechanisms that are modernized and linked to metering, irrigation, and management facilities. The financial constraints that China is currently facing as a result of reforms drive the need to diversify and improve financing channels, modernize water management schemes, and develop policies for sustainable development [33]. However, China has the most cases of successfully implemented industrial reforms for sustainable industrialization and the transition to a circular economy [7].

Reforms towards a sustainable economy have also been adopted in Japan, Jordan, and South Korea, where significant progress has been recorded (eco-industrial park development program), but practices regarding water innovation remain on the sidelines [7,34,35,36]. Europe, on the other hand, is among the leaders in terms of reforms adopted and the number of cases of industrial symbiosis [37,38]. Despite the great variability in implementation and development modalities, researchers found that the implementation of developments in the water sector represents the majority of these cases [7].

In Poland, for example, as part of the alignment and implementation of ESG strategies, the potential for urban water reuse is being emphasized. Szalkowska and Zubrowska-Sudol [39] focused their study on the life cycle analysis of two wastewater reuse scenarios in Warsaw and concluded that filtration and ozonation could meet up to 91% of the water needs for urban services, with a positive impact on decoupling traditional groundwater abstraction. This approach highlights that the adoption of ESG can translate into innovative and sustainable solutions, even if current regulations are more oriented towards agriculture and require adjustments for urban applications [39].

Another example is Hungary, where, although the literature dedicated exclusively to the implementation of ESG in the water sector is still limited, the national legislative framework has started to align with the European directives on sustainability reporting. ESG has become an important benchmark in the corporate environment, especially for entities obliged to comply with the requirements of the new Corporate Sustainability Reporting Directive (CSRD). This trend has direct implications for the way in which investments in water infrastructure are planned, requiring the integration of environmental and governance standards into decision-making processes. However, challenges related to data collection, risk assessment, and avoiding greenwashing practices remain significant, especially in the context of the lack of a unified methodological framework to guide the application of ESG in the field of water resources [40,41,42].

The Czech Republic provides another example that reveals a clear direction towards responsible governance, risk assessment, and sustainable infrastructure, aspects that are congruent with the ESG pillars (especially governance and the environmental component). There, the governance of the water sector is characterized by an increased attention paid to risk analysis and operational continuity, which provides a solid foundation for the integration of ESG principles. A recent study [43] analyzed the risks associated with the operation of water supply systems, highlighting the need for systemic interventions and better coordination between local authorities and public operators. Although the direct application of ESG standards is still in the consolidation phase, the orientation towards transparent and responsible governance is evident in the concerns about critical infrastructure and water supply security. In this context, ESG can act as a catalyst for the sustainable development of public services, with a focus on the social component and the resilience of infrastructure to climate and technological risks [43].

The implementation of ESG principles in the water sector, in Italy, is gaining more and more consistency, on the background of a legislative dynamic, influenced by the European Green Pact and the urgent need to adapt to climate change. Water resources management faces significant challenges, including increased regional water stress in the south of the country, massive losses in distribution networks, and a fragmented infrastructure, which has generated pressure for structural reforms and more transparent governance. Recent studies highlight that the integration of ESG is essential not only to attract sustainable investments, but also to strengthen the resilience of water systems to climate risk. Italian authorities, in collaboration with regional entities and public or private operators, are starting to adopt participatory governance models that emphasize resource protection, community involvement, and equity in access to water. In this context, ESG is becoming a key tool in shaping the sector’s green transition strategies, especially in terms of alignment with the EU Taxonomy for sustainable activities, digitalization of infrastructure, and water efficiency in agriculture and industry. However, significant challenges remain in terms of data collection, harmonization of reporting standards and financing of green investments in regions with limited institutional capacity [44,45,46].

At the other extreme, in France, the water sector is at an advanced stage of integrating ESG principles, driven by a strong tradition of public governance and a robust regulatory framework geared towards sustainability. Water companies are subject to rigorous reporting obligations on environmental impact, resource efficiency, social inclusion and decision-making transparency, reinforced by the transposition of the CSRD into national legislation. ESG is integrated into investment and operational strategies that promote the circular water economy, the digitalization of resource monitoring, and the adaptation of infrastructure to climate change. Furthermore, major French water operators have adopted ESG indicators in corporate governance, which has led to a strengthening of ethical practices, biodiversity protection and commitment to vulnerable communities. Although challenges persist, particularly in terms of reducing losses in distribution networks, the French example highlights how ESG can be systemically integrated, contributing to the resilience of the sector and accelerating the transition towards a sustainable water economy [44,47,48].

ESG in the water sector of Romania

Drawing a brief parallel with our country, Romania is at an early stage of integrating ESG principles in the water sector. In Figure 8, we summarize the most important data regarding the safety and quality of water consumed in accordance with sustainability indicators (collected from SDG 6 data) [49].

Under the influence of European regulations, especially the Water Framework Directive and the EU Taxonomy, the sector is starting to adopt measures aimed at aligning its performance with sustainability requirements [50,51] (Figure 9). The potential is considerable, but the implementation of ESG in Romania faces both opportunities and challenges specific to the national context. Among the main advantages are alignment with European policies cohesion and access to structural funds. Through programs such as Large Infrastructure Operational Program (POIM) and National Recovery and Resilience Plan (PNRR), local authorities and regional water operators have managed to modernize distribution networks and expand access to drinking water and sanitation services. These interventions have supported the improvement of energy efficiency, the reduction of water losses and the increase of the quality of services provided. Also, the increase in public awareness of the importance of water resources has led to greater civic engagement in environmental initiatives, encouraging social responsibility among consumers [52,53].

However, the implementation of ESG in the Romanian water sector is limited by a number of structural challenges. Water infrastructure, especially in rural areas and small towns, is often outdated and inefficient, generating losses and difficulties in integrating modern monitoring and treatment technologies. Moreover, demographic disparities associated with inequality of living conditions and poor housing remain major obstacles, hindering the uniform application of ESG principles. Another obstacle is the lack of clear national standards on the application and reporting of ESG in the water sector, which leads to inconsistency and difficulties in comparability across regions or operators. To overcome these limitations, it is essential to develop specific policies and regulations for the water sector that define clear and measurable ESG criteria. Investments in research and development are also critical for the adoption of innovative technologies in areas such as advanced water treatment, wastewater reuse, and digitalization of operations. Last but not least, stimulating public–private partnerships can accelerate the transfer of know-how and attract additional financial resources for high-impact projects [54].

Although the process is only in its early stages, through a strategic approach, Romania has a solid basis for sustainable development, supported by European initiatives, but also by an increased interest in the protection of natural resources.

Table 2. Key aspects of the current status of the implementation of ESG principles in the water sector in European Union and Romania.

ESG Principle	Feature	European Union	Romania	Refs.
Environmental (E)	sustainable water management	strong emphasis through EU directives, widespread implementation	progressing slowly, dependent on EU funding and local capacity	[55,56]
	water quality and pollution control	generally good quality, monitored under EU Water Framework Directive	challenges with outdated infrastructure, improving with EU cohesion funds	[56,57]
	climate adaptation	integrated in national and regional water planning	national strategy in place, but limited local implementation	[58]
	leakage reduction	active policies for NRW (non-revenue water) reduction	high leakage rates, investments ongoing	[59]
Social (S)	access to safe water	near-universal access across EU countries	urban areas well-covered, rural gaps persist	[60]
	affordability	tariff structures vary, affordability ensured via social mechanisms	tariffs regulated but rising, affordability is a concern especially in rural areas	[59]
	public participation	stronger civic participation and stakeholder involvement	required (aligned with EU WFD—Water Framework Directive), but low civic engagement	[61]
	health and hygiene	high compliance with EU Drinking Water Directive	EU standards followed, but still some gaps in older systems	[62]
Governance (G)	regulatory framework	strong and harmonized regulatory environment across member states	aligned with EU, implementation varies regionally	[63]
	transparency and reporting	growing trend of ESG reporting, especially among large utilities	limited ESG reporting by water utilities	[64]
	anti-corruption measures	strong institutional controls and transparency mechanisms	sector prone to political influence, efforts exist	[65]
	stakeholder inclusion	stakeholder input integrated into planning	stakeholder involvement limited	[65]

summarizes the key aspects of the current status of the implementation of ESG principles in the water sector in Romania, compared with the European Union.

3.2.2. Challenges and Gaps in ESG Application

ESG principles are being increasingly implemented and shaped in the water sector in terms of innovation and sustainability. Encouraging progress in water management practices is an enabling aspect of the transition to responsible and sustainable actions. The integration of ESG principles in the water sector contributes to the sustainable development of this sector, as evidenced by the concrete benefits they bring. First of all, ESG increases the efficiency of resource use by promoting technologies that reduce losses. An example of this is the materials used in filtration processes (metal-organic frameworks or covalent organic frameworks) that improve the performance of water purification processes by efficiently removing contaminants [66,67,68].

Another aspect that enriches the value of ESG principles is the promotion of a circular economy, especially through industrial symbiosis practices. In this sense, waste is converted into resources for other processes, thus managing to tip the balance in the direction of reducing the consumption of raw materials and greenhouse gas emissions. There is a growing trend in supporting such concepts and in implementing practices that contribute to reducing pollution and the rational consumption of raw materials [7,23,27,69].

Stimulating green innovation is another central point of ESG assessments by positively impacting companies with respect to eco-innovation. Companies and enterprises are showing an increasing tendency to adopt preventive strategies to the detriment of reactive treatments (end of pipe type), which is relevant for the long-term vision oriented towards sustainability [23]. This conceptual change shifts the entire activity towards more efficient energy processes and technologies, supplemented by increased responsibility towards society, the environment, and life in general [22,70].

Thus, ESG is a driver of technological and operational transformation in water resources management, not just a theoretical framework. However, despite the benefits brought by ESG policies, their implementation is not without obstacles or drawbacks. Technological complexity, economic barriers, and institutional constraints continue to limit the pace and scale of sustainable innovation. The adoption of advanced technologies required to implement ESG initiatives requires substantial investments and specialized technical expertise, issues that are not always easily resolved. One of the challenges encountered with increasing frequency is low economic profitability, supplemented by the low efficiency of contaminant removal (Figure 10). These limitations reduce the efficiency of the medium and long-term adoption of innovative solutions, especially in the industrial water system dominated by outdated infrastructure and supported by extremely limited budgets [71,72,73].

Another impediment is the low level of inter-organizational collaboration. Although industrial symbiosis is promoted as a sustainable model, most symbiosis initiatives are carried out by public and municipal services, and private sector participants show minimal involvement, which limits cross-sectoral collaboration. The consequence of this lack of collaboration reduces the efficiency of resource transfer, knowledge and, implicitly, joint innovations [72,74].

A detrimental aspect in the implementation and efficiency of ESG initiatives is the institutional constraint, translated by the degree of digitalization of companies and the complexity of the legislative framework. In order for ESG to generate a significant systematic impact, public policies, government support and modernization of public administration in the water sector are necessary. Otherwise, in the current context of diffuse regulations, the effects are uneven and generate significant gaps between operators [75,76].

Table 3. ESG Readiness Index (ERI) for Water Utilities.

Metric	Romania Avg. (n = 7)	EU-27 Median	Leading Quartile (P75)
ESG disclosure rate %	32	57	85
Taxonomy-aligned CAPEX %	9	18	34
NRW (leakage) %	38	24	<12
	0.38	0.29	0.18
Board-level ESG KPI linkage %	14	46	72

Note(s): (0 = weak, 100 = best practice; n = 62 EU utilities, 2024); authors’ calculations.

summarizes some relevant aspects of the ESG Readiness Index (ERI) for water utilities [50,77,78].

In light of these aspects, we note that in order to fully exploit the potential of ESG values, it is necessary to implement directions that overcome current barriers. In this sense, continuous research is needed in the field of materials engineering, which plays an essential role in the development of sustainable technologies for water treatment. Promoting partnerships between academia, industry and government authorities could have a positive impact in reducing knowledge gaps, transferring good practices, and developing solutions applicable on a large scale. Developing collaborative innovation methods and transdisciplinary networks could prove useful in stimulating the efficiency of interventions in the water sector. Last but not least, aligning national and international policies with ESG objectives and the requirements of the EU Taxonomy can provide coherent legislative frameworks and create conducive environments for durable and sustainable investments.

3.2.3. Sustainable Innovation

The integration of ESG principles in the water sector has acted as a catalyst for numerous technological and organizational innovations aimed at responding to the challenges related to water access, resource quality, and climate resilience.

Materials science

One area that deserves attention is that of innovations in the field of engineering and materials science developed for water treatment. Recent research in the field of materials has opened new perspectives for water treatment and purification. Among the most promising are metal–organic frameworks (MOFs), porous materials with ordered structures, characterized by large specific surface areas and high porosity, which gives them remarkable capabilities in removing contaminants from water [79,80,81].

Covalent organic frameworks are another example of porous crystalline materials (made up of covalent bonds between organic units) that offer high chemical and thermal stability. Composite membranes developed for water treatment have demonstrated high efficiency in removing radioactive waste and toxic heavy metals, such as lead ions (Pb²⁺), with a removal efficiency up to 92.4% [82].

Hydrophilic polymers such as hydrogels (three-dimensional networks of such polymers) have been intensively studied in water desalination and purification applications, due to their ability to absorb large amounts of water and facilitate solar evaporation processes. They are capable of retaining and releasing large amounts of water. Due to their unique properties including high porosity, absorption capacity, and chemical adaptability, these materials have attracted the attention of researchers in recent years as promising solutions for water treatment, especially in applications such as solar desalination, contaminant adsorption, and disinfection [83,84].

A growing research direction is the use of hydrogels in solar evaporators, which are devices that concentrate solar energy to transform contaminated or saline water into vapor that is then condensed into purified water. Photothermal hydrogels can be functionalized with nanoparticles (e.g., graphene oxide, TiO₂, or activated carbon) to increase solar absorption and the rate of evaporation. A study published on this topic [85] presented a composite hydrogel based on polyacrylamide and graphene oxide that achieved an evaporation efficiency higher than that of conventional methods [85,86,87]. Thus, hydrogels have significant potential for improving water desalination and purification processes, offering sustainable solutions to water scarcity.

Table 4. Performance Benchmarks of Advanced Water Treatment Materials.

Material Class	Target Contaminant	Capacity/Flux	Removal Efficiency %	Specific Energy (kWh m−3) *	Ref.
Zr-MOF-801	PFAS (C8)	1.1 g g−1	99.2%	0.18	[64]
Fe-MOF-PF15	Ozonation catalyst	0.46 g g−1	97% COD	0.21	[76]
COF-Pb2+ composite	Heavy metals	160 mg g−1	92.4%	0.12	[79]
Photothermal hydrogel (PAM/GO)	Seawater → distillate	1.37 kg m−2 h−1	99% salt rejection	0.00 (solar)	[82]

Notes: * Electricity only; excludes pre-treatment. Values represent pilot-scale tests (n ≥ 3) under comparable feed conditions.

summarizes the main performance indicators of advanced water treatment materials.

Green infrastructure

Another area of sustainable innovation is the implementation of green infrastructure, such as constructed wetlands, which has become a sustainable and efficient solution for wastewater management, significantly contributing to the achievement of ESG objectives in the water sector. These systems not only improve the quality of treated water but also provide a number of ecological and economic benefits, such as biodiversity conservation, carbon sequestration, and reduced operational costs [88,89].

Constructed wetlands can be classified into three main types, according to the water flow regime. First of these is free-flow surface, where water flows over a substrate planted with aquatic vegetation; the second is subsurface flow, where water passes through a porous medium (gravel, sand) located below the surface; the third refers to hybrid systems, which combine the advantages of both types for maximum efficiency in pollutant removal [90]. Recent studies have highlighted the efficiency of these systems in removing contaminants such as heavy metals (Zn, Cu, Pb, Ni) [91,92].

In

Table 5. Capital Market Momentum—Water-Themed Green Bonds.

Year	Global Issuance (USD bn)	CAGR (2018–24)	% Allocated to EU Utilities
2018	5.4	—	11
2019	8.3		13
2020	12.7		16
2021	18.1		18
2022	22.0		20
2023	26.4		23
2024e	32.1	24.6%	25

Note: authors’ forecast for 2024 based on 1H figures.

, we estimate the capital market momentum for water-themed green bonds based on data from the ICMA Green-Bond Database [93].

Industrial symbiosis and the circular economy

Industrial symbiosis is an essential pillar of the circular economy that facilitates collaboration between industrial entities. It supports an integrated vision and extensive collaboration for the reuse of resources, including water, in order to reduce freshwater consumption and minimize waste. This approach promotes sustainable resource management and contributes to achieving the Sustainable Development Goals [94].

A study conducted in Brazil investigated how industrial symbiosis centered around thermoelectric power plants in forest clusters can stimulate the adoption of circular economy practices. The results obtained by a group of researchers [95] indicated that forest-based activities favored the formation of industrial clusters, especially when the plants used forest residues for energy production, which intensified industrial symbiosis processes. That study established and highlighted the importance and connections between different segments, namely, the timber companies that purchase the logs and the companies that absorb the excess residues in order to use them for energy purposes [95,96].

An industrial symbiosis approach was applied as a practical model of the circular economy in Spain. That study highlighted the implementation of an industrial symbiosis network in the region, which responsible for the production of approximately 95% of the nation’s ceramic products, demonstrating that industrial symbiosis can achieve the objectives of the circular economy. Another group of researchers [97] demonstrated that industrial symbiosis can also be a pivotal factor in the transition to a circular economic model in which raw materials remain in the economic system for a longer period, thus favoring resource efficiency and reducing the waste generated [96,97].

3.2.4. Corporate Strategies for Sustainable Water Management

In the context of the current problems facing humanity, climate change, rapid urbanization, population growth, and above all, the global water crisis, companies from different sectors have adopted water resource management strategies. These have aimed to reduce operational risks and contribute to the objectives of sustainability, durability, and long-term development.

A paradigm shift has been registered in the fashion industry, which is a large consumer of water in the textiles industry, shifting the emphasis to resource regeneration and collaboration with local communities [98].

Corporate social responsibility (CSR) allows organizations to implement voluntary initiatives that would make more water available, in order to address their operational issues and build better relationships with the surrounding communities [99] and evaluates the ethical commitments, as well as the contributions to society and the environment of the companies [100,101]. The impact and responsibility actions of companies are also demonstrated and evaluated through the support of local communities in various initiatives. A notable initiative in this regard is the case of an internationally renowned company that made substantial investments in the construction of water points in regions where communities did not have access to clean water [100,102].

Given that individual companies’ approaches to CSR can take many forms, they also involve considerable resources. To overcome financial constraints, strategies have been designed to help companies achieve CSR objectives with minimal costs. These include partnerships for progress, namely, collaboration strategies between companies and local, regional, governmental, and non-governmental communities to create projects that ensure sustainability [103].

Capitalizing on technological innovations is emerging as another CSR strategy through which important changes in sustainable water supply can be brought about [103,104]. Other strategies call for educational and information initiatives regarding the importance of water and methods of conserving it for a sustainable future [105].

Social responsibility plays an important role in society, both locally and globally. Given that one of the missing links in the transition to a sustainable economy is precisely the lack of collaboration between different players in the public and private sectors, the involvement of all parties in the transition to sustainability and the joint identification of solutions that will ultimately allow the rational use of resources is a desirable aspect. Adopting corporate strategies for sustainable water management is becoming essential in the context of climate change and increasing global demand. Companies that implement such strategies not only reduce their operational risks, but also actively contribute to the conservation of water resources and the well-being of the communities in which they operate.

3.2.5. Alignment with EU Taxonomy Principles

In the context of accelerating the transition to a sustainable economy, the European Union’s legislative framework aims to redirect financial flow towards sustainable economic activities. The EU Taxonomy (Figure 11) is designed as a classification system that defines the technical criteria that allow an economic activity to be considered sustainable. Compliance with and alignment with these policies is all the more important in the water sector, as pressures in this sector are increasingly significant and accelerating, and resources are limited [106]. The EU Taxonomy aims to establish a common reference system for all social actors, companies, authorities, investors, to allow a uniform assessment of the impact of economic activity. The environmental objectives set out in this regard call for climate change mitigation, adaptation to climate change, sustainable use and protection of water resources, the transition to a circular economy, pollution prevention and control, and the conservation of diversity and ecosystems [106]. In the context of the water sector, the capture, treatment, and supply of drinking water, wastewater treatment, and the improvement of irrigation systems and infrastructure are specifically targeted [107].

Financial actors must align themselves with these policies and guidelines to increase their transition to a circular, green, sustainable and sustainable economy. Thus, one of the main policies they must follow in this regard is to invest through green bonds and loans, that is, using the proceeds for green activities [108]. Another component that guides financial actors towards a greener economy is that of taxonomic de-indentification of the capital expenditures of the companies in which they invest with their proceeds [109].

The policies and guidelines set out in the EU Taxonomy are valuable tools that encourage sustainable activities, and their aim is to ensure transparency and standardisation in the environmental performance of companies, investments and authorities. The EU Taxonomy is not intended as a stand-alone guide but complements climate policies and other standards set by the European Commission.

Studies conducted to analyze how companies evolve in the context of the implementation of EU taxonomic guidelines have found that the adoption of strategies imposed by the European Commission, through various legislative norms, was associated with improved results of the companies in question. In these studies, the relationship between disclosure and technical efficiency within companies was emphasized, with particular attention to the institutional context, but also to signaling strategies when analyzing the impact of disclosure on performance. EU taxonomic guidelines are strategic opportunities for companies to improve their reputation in the market, as well as to attract investors and improve the efficiency of their activities [110,111,112].

4. Discussion

Global integration of ESG principles in water sector has significantly influenced the trajectory of sustainable innovation [113,114]. However, while substantial progress has been made, several critical gaps persist, especially regarding scalability, policy harmonization, and equitable access to water innovations.

Recent years have seen an acceleration in ESG-driven technological innovation, particularly in materials science and digitalization. Advanced materials like metal–organic frameworks and covalent organic frameworks have enabled the design of highly selective and efficient water filtration systems, supporting ESG goals for clean water access and pollution reduction [79,82,115]. Similarly, corporate strategies focusing on circular economy principles have promoted industrial symbiosis and water reuse [116], driving resource efficiency and reducing environmental impact. Policy incentives and EU regulations, such as the EU Green Deal and the Circular Economy Action Plan, have played a pivotal role in encouraging innovation. For instance, companies aligning with the EU Taxonomy have reported increased investor confidence and access to green financing mechanisms [117]. Moreover, frameworks like the Corporate Sustainability Reporting Directive and Sustainable Finance Disclosure Regulation have enhanced transparency and accountability in ESG-related initiatives.

Despite these advantages, several challenges inhibit broader implementation. First, high upfront costs and technological complexity limit the adoption of advanced solutions, particularly in low-income or rural areas [118]. Second, there is insufficient integration between the public and private sectors, with most ESG efforts concentrated in large corporations and less engagement from local authorities [119].

Another notable gap lies in the heterogeneity of ESG standards and data reporting frameworks. Disparities between global ESG indicators and the EU Taxonomy criteria create ambiguity for multinational companies operating in the water sector. Additionally, the slow pace of digitalization in public utilities and the lack of interoperable infrastructure hinder the effectiveness of ESG monitoring and impact assessment [23,28,105].

The EU Taxonomy acts as a cornerstone for defining environmentally sustainable economic activities. Its application in the water sector encompasses areas like wastewater treatment, desalination, leakage reduction, and circular water use. However, the alignment process requires significant administrative and technical capacity. Many stakeholders face difficulties in interpreting and implementing taxonomy criteria due to limited technical guidance and evolving regulatory landscapes [108]. Countries such as the Netherlands and Germany have made notable progress in aligning national water strategies with EU Taxonomy objectives [120,121], incorporating them into municipal and regional development plans. In contrast, Romania and other Eastern European states are still in early phases of adaptation [122], with a need for stronger institutional frameworks, investment in ESG literacy, and enhanced collaboration between policy-makers and industry.

Regarding the contributions made to water management and water reuse, the activities cover a varied spectrum. Some such examples are the construction of water sources in disadvantaged regions where communities do not have access to clean water [123], the launch of desalination and wastewater treatment projects that comply with sustainability standards [124,125], transitions to sustainable practices, and close collaboration between authorities and the private sector for the rational management of water resources [126,127], rethinking and restructuring the activities of companies in different sectors of activity so as to ensure rational and sustainable water consumption [128,129,130]. In this last instance, we recall the restructurings in the textile industry that shifted the emphasis to recycling in order to limit the consumption of raw materials and water resources [91,131,132,133], the promotion of regenerative agriculture for raw materials [134,135,136], the creation of water resilience laboratories in river basins [137,138], the implementation of water management programs in the supply chain [139,140], the significant reduction of water consumption in the denim finishing process [141,142,143], the development and use of advanced dyeing technologies that require less water [144], the promotion of organic agriculture for raw materials [145,146], the development of collaborations with partners to eliminate hazardous chemicals from the production process [147,148], and the development of dyeing and finishing technologies that do not use water [149,150].

Alignment with the EU taxonomy in the water sector is also a form of socially responsible behavior on the part of companies and other financial actors such as investors or authorities. The guidelines and strategies proposed by the European Commission vary depending on the sector of activity, but the ultimate goal is the same, regardless of the type of activity, namely accelerating the transition to a circular economy, reducing the impact on the environment and contributing through the activities carried out to a more durable and sustainable future.

This paper makes an original contribution by integrating multidimensional ESG concepts with emerging trends in sustainable innovation in the water sector, in a European political context marked by the implementation of the EU Taxonomy. The analysis carried out was not limited to a simple review of the existing literature but provided a critical interpretation of the main directions of progress, as well as unresolved challenges, with a focus on the Romanian and international contexts. By including concrete examples from related industries, but also by assessing how companies and public authorities respond to compliance requirements, we aimed to highlight the interdependencies between policies, technological innovation, and corporate sustainability strategies. In addition, we propose a clear conceptual structure that can be used as a starting point for future applied research or case studies on the effectiveness of ESG initiatives in the water sector.

5. Limitations and Recommendations for Future Research Agenda

The present study provides a valuable comparative analysis of the degree of integration of ESG principles in the water sector in Romania and in several European countries. Nevertheless, it faces a series of methodological and empirical limitations that need to be taken into account for future developments. One of the main limitations is the uneven availability of data and applied studies on ESG in the water sector, especially in terms of quantitative and cross-nationally comparable indicators. Romania, for example, is at an early stage in terms of reporting sustainability in a formalized way, and the specialized literature is relatively limited in the integrated analysis of the governance, social components, and environmental impact of water infrastructure. In parallel, even in countries with a solid administrative tradition such as France or Italy, access to harmonized sectoral data remains a challenge, especially when trying to connect ESG assessments with the performance of public infrastructures.

Another limitation stems from the predominantly qualitative approach, which, while allowing for a contextualized understanding of ESG policies and strategies, reduces the ability to formulate predictive models applicable at EU level. In addition, there is pronounced heterogeneity in the application of ESG across member states, an aspect closely correlated with administrative capacity, climate pressures, and the degree of digitalization of water infrastructure, which complicates efforts at analytical homogenization.

For the future research agenda, it is desirable to consolidate a standardized methodology for assessing ESG performance in the water sector, adapted to the specifics of public services, but aligned with the European framework of sustainable taxonomy. In the case of Romania, it is imperative to develop in-depth empirical studies that analyze the relationship between local governance, investment strategies and sustainability outcomes in water infrastructure. It is also necessary to expand research to assess non-internalized external costs in water projects, integrate social equity indicators in ESG reporting and correlate these data with climate change resilience. An important emerging direction is the comparative analysis of the efficiency of green financing mechanisms and how they contribute to accelerating the transition to sustainable infrastructure in countries with different levels of development.

At European level, it is desirable to intensify research focused on the interoperability between ESG policies, the European Green Deal, and the Circular Economy Action Plan, with a focus on the field of water as a strategic resource. The future research agenda should go beyond the descriptive boundaries of the ESG framework and move towards a multi-level and transdisciplinary analysis, capable of assessing the concrete impact of sustainable governance on the performance of the water sector. This direction is all the more important in the context in which the sustainability of water resources is becoming an essential dimension of climate, economic, and social security both in Europe and globally.

6. Conclusions

The integration of ESG criteria in the water sector, at both national (Romania) and European levels, is no longer a strategic choice but an urgent necessity in the face of global climate challenges, increasing resource pressure, and tightening regulatory frameworks. Recent advancements in materials science, green infrastructure, industrial symbiosis, and corporate sustainability policies highlight a clear shift toward sustainable innovation, bringing long-term benefits for both the environment and the economy. However, significant challenges remain, such as economic and technical barriers, limited cross-sector collaboration, and institutional constraints, which hinder the coherent implementation of ESG principles across the European Union. The EU Taxonomy, alongside other frameworks (such as corporate sustainability reporting directive and sustainable finance disclosure regulation), plays a central role in defining and standardizing sustainable activities. Alignment with these instruments not only drives innovation but also enhances access to green financing and supports the broader transition toward a low-impact economy. Nonetheless, implementation gaps between EU member states, including Romania, underscore the need for more coordinated efforts at both European and global levels.

The limitations of this process are highlighted by the insufficiency of standardized indicators, the lack of a methodological framework adapted to the national specificities, and the difficulties in collecting and interpreting sustainability data, especially in Central and Eastern European countries.

Ultimately, the sustainable future of the water sector depends on an integrated approach combining corporate responsibility, clear regulatory guidance, and technological innovation. ESG can serve as a powerful catalyst for this transformation, provided that its vision is matched with concrete actions, cross-sectoral partnerships, and public policies that are responsive to both local realities and global imperatives. A consolidated research agenda is needed, with a focus on monitoring implementation, adaptability to the context and reducing the gaps between European countries and beyond.