Countering water scarcity and heat: Cities must become sponges

The summer of 2026 is breaking records – not only in terms of temperature but also in terms of drought. As a result of heatwaves across Europe and the lack of rainfall, water levels in major rivers such as the Rhine and the Danube have dropped to historic lows. The same applies to groundwater, even in countries considered water‑rich, such as Germany or “Europe’s water tower”, Switzerland. According to the European Environment Agency (EEA), 30% of people in Europe are already feeling the effects of water scarcity.

Urban areas particularly exposed to water scarcity and extreme weather

This is partly due to the fact that most people on the continent live in cities – and urban areas are particularly affected by extreme weather situations. On the one hand, dense development and dark asphalt surfaces turn them into “heat islands” during the summer months. In Switzerland, for example, the temperature difference between urban and rural areas can reach up to 6°C during heatwaves, as the federal government has calculated.

On the other hand, they are vulnerable to the increasing phenomenon of stormwater. Because urban soil is often sealed, rainwater can only infiltrate to a limited extent, and ageing sewer systems are quickly overwhelmed by large volumes of water. Potential consequences include devastating floods, damaged infrastructure and large quantities of contaminated water.

Combating heat and water scarcity – a structural growth driver

Improved water management and measures against extreme weather events are therefore moving up the agenda of cities, national governments and supranational organisations such as the EU. In 2025, the latter revised the Urban Waste Water Treatment Directive, thereby also addressing the consequences of extreme weather.

In our view, such measures can be interesting from a sustainable investment perspective. They create the conditions for tackling the challenges posed by extreme weather through investment. This in turn offers the potential for long‑term, above‑average growth, benefiting companies that drive forward solutions for more resilient urban development and modern water infrastructure with their products and services.

Digital twins as the starting point for solutions to water scarcity

The process begins at the planning stage, where technological solutions such as so‑called digital twins are increasingly being used in infrastructure planning. They can be used to simulate flooding scenarios, calculate heat islands and cooling effects, and plan targeted irrigation. This virtual modelling not only offers cost advantages: planning errors and expensive subsequent corrections during construction can be avoided.

Virtual planning also creates the basis for innovative solutions at the interface between heat and water management. We consider the concept of the so‑called sponge city to be particularly exciting in this context.

This refers to construction measures that store precipitation in a way similar to a sponge and make the water efficiently available again during periods of heat and drought. The stored water is used to irrigate trees and green spaces and feed ponds and water basins – all elements that have been shown to cool the surrounding area and generally create a more humid microclimate. The German architecture magazine Baunetz.de, for example, lists the following “building blocks” of a sponge city and illustrates how they interact:

• Permeable surfaces: Depressions and retention areas with porous surfaces promote infiltration and return precipitation to the groundwater.
• Wind and microclimate optimisation: Street spaces are designed so that fresh air flows are not blocked and the evaporative cooling from parks and bodies of water is transported into neighbourhoods. Digital simulations and design guidelines are developed and continuously optimised for this purpose.
• Green and blue infrastructure: Green spaces as well as green roofs and façades also capture precipitation and gradually release it again through evaporation. This can help to cool the environment. Ponds, fountains and basins store water and, thanks to their large surface area, have a high evaporation rate. These characteristics enable them to positively influence the microclimate and, if necessary, to absorb heavy rainfall.
• Rainwater use: Rainwater can be retained for targeted irrigation, for example via so‑called tree trenches, artificial basins beneath the roots of trees. The water collected there can be used for irrigation during dry periods.

Such elements are increasingly being found in cities. Numerous municipalities, especially in Germany (see box above), have launched sponge city pilot projects and in some cases have planned entire neighbourhoods in line with its criteria. Interestingly, however, an emerging market is considered the cradle of the concept: According to the World Bank, China already has more than 70 sponge cities. By 2030, 80% of Chinese cities are expected to be able to absorb 70% of their rainfall.

Solutions to heat and water scarcity: focusing on suppliers to sponge cities

With these building blocks for better resilience to heat and water scarcity in mind, the products and services of the following companies appear exemplary to us:

• Sweco: The offerings of this Swedish consulting company include so‑called digital twins. These provide a precise virtual representation of roofs, façades, streets and green spaces and link geospatial, climate and building data. This forms the basis for high‑resolution heat maps (with a grid as fine as 1×1 metres) that display surface temperatures in clearly graded colour classes. Urban planners can quickly identify heat islands and use the model to test countermeasures such as lighter pavements, more trees or green roofs – data‑driven, efficient and without any physical interventions in the real environment.
• Sika: The “Blue Roof” flat roof system from this Swiss blue‑chip company is designed to collect and retain precipitation – a core function of the sponge city. The stored rainwater is then discharged in a controlled manner thanks to a combination of waterproof membranes and flow regulators. This system is intended to help prevent flooding and relieve pressure on urban drainage networks.
• Genuit Group: The water management division of this British construction supplier focuses on modernising wastewater infrastructure in light of climate change. Genuit’s floodwater drainage systems can help mitigate the impact of heavy rainfall in urban areas.

Our conclusion:

The sponge city, which combines the investment areas of water protection and water technology, offers approaches to contemporary water management for people and the environment and is encountering explicit industrial demand. The strong demand for services and products in these areas can in turn act as a driver for the growth potential of the entire water sector: this sector is recording annual growth of 4 to 6% – significantly more than the global GDP growth expectations of 2 to 3%. This confirms our hypothesis that sustainable, long‑term investments in the water theme can offer above‑average growth in returns.