The UK fund sector has made major strides in improving its ESG credentials but major improvements are still needed, according to a new report from pension consultants XPS.

XPS has warned that so-called ‘greenwashing’ claims - funds which make fake or exaggerated green credentials - remain a risk in one in four equity funds (26%).

XPS found that 11% of all funds and 26% of equity funds were unable to provide any examples of E, S or G factors being taken into account in investment decisions. 

The company says that, on the positive side, 23% of UK investment funds have been awarded an XPS green rating for ESG, up from 10% last year.

Overall one in four funds cannot provide any examples of ESG being incorporated into decision making. 

The findings come from XPS Investment’s ESG ratings Review 2021, which assessed 54 fund managers and 199 funds on their ESG risk management processes.

Areas for improvement include stewardship by fund managers and meaningful progress in terms of carbon footprint reporting. 

XPS says that fixed income funds were most consistent in evidencing robust integration of ESG compared to other asset classes. 

Last year only 60% of funds referenced ESG in their investment policy, whereas this year all of them did. 

XPS says its report suggests at firm level ESG policies are being widely adopted but this is not filtering down to individual fund managers.

Simeon Willis, chief investment officer, at XPS said: “Effective ESG risk management must be underpinned by a clear ESG philosophy, and most firms now have this essential foundation in place. But managers must move beyond words to actions for this to matter, and this needs to be consistent across all their funds and be well communicated to clients.”