Learn Hardcore Catalan: Això és aigua.

Això is a neuter demonstrative pronoun. It means something like this / this thing / that when you are referring to something without naming a noun.

So in Això és aigua, you are basically saying This is water.

By contrast, aquest is masculine singular and normally goes with a noun, for example:

aquest llibre = this book

You would not normally use aquest by itself here unless you were referring to a specific masculine noun already understood from context.

Does això mean this or that?

It often corresponds to this, but in practice it can sometimes cover both this and that, depending on context.

A useful beginner rule is:

això = this / this thing
allò = that / that thing over there

Catalan does not always match English distance distinctions exactly, so the best translation depends on the situation.

Why is the verb és used here?