The FCA published its review ahead of its final rules and guidance on Sustainability Disclosure Requirements and investment labels regime, which is expected to be released by the end of this year.
The regulator determined that while most fund management firms had made "efforts to comply" with its expectations around the design, delivery and disclosure of their ESG and sustainable funds, "further improvement is needed".
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In the review, the FCA said it had found "evidence of good practice, such as the development and use of appropriate ESG and sustainability scoring systems and benchmarks", and highlighted "good practice where AFMs conducted thorough due diligence on third party data providers".
However, it said "while progress has been made, the FCA has found that many firms still have further to go to meet its expectations, particularly around the disclosure and clarity of information being given to retail investors and consumers".
Other examples of "poor practice" it identified were products being "inconsistently aligned with their ESG and sustainability goals", even if it was referenced in the fund's name.
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It also found that in some firms, funds' assets "appeared inconsistent" with their ESG and/or sustainability objectives, while some managers "were not able to explain how these investments fit with their goals".
Key ESG and sustainability information was also found to be unexplained or put into context for clients, and the design of some stewardship approaches "did not meet the FCA's expectations".
Camille Blackburn, director of wholesale buy side at the FCA, said the UK asset management space was "world leading" and the upcoming changes on how ESG themed retail products are labelled "will help retail investors and consumers understand and be confident in knowing exactly what they are investing in".
"Embedding the Guiding Principles and the good practice we have identified in our review will help firms to comply with proposed new requirements under the SDR and investment labels rules, alongside their Consumer Duty obligations," she added.