The European Union is to stop funding oil, gas and coal projects at the end of 2021, cutting €2bn (£1.7bn) of yearly investments.
The European Investment Bank (EIB), the EU’s financing department, will bar funding for most fossil fuel projects.
The ban will come into effect a year later than originally proposed after lobbying by EU member states.
Since 2013, the EIB has funded €13.4bn of fossil fuel projects.
Last year it funded about €2bn worth of projects.
Under the new policy, energy projects applying for EIB funding will need to show they can produce one kilowatt hour of energy while emitting less than 250 grams of carbon dioxide, a move which excludes traditional gas-burning power plants.
Gas projects are still possible, but would have to be based on what the bank called “new technologies” such as carbon capture and storage, combining heat and power generation, or mixing in renewable gases with the fossil natural gas.
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Andrew McDowell, the EIB’s vice-president responsible for energy, said: “This is an important first step – this is not the last step.”
Gas projects are fairly common in EU member states as they are seen as a cleaner alternative to coal and oil as countries transition away from using fossil fuels.
Environmental organisations welcomed the EIB decision, but said they were disappointed at the one-year delay.
“Hats off to the European Investment Bank and those countries who fought hard to help it set a global benchmark today,” said Sebastien Godinot, an economist at the World Wildlife Fund.
The EIB’s decision comes after EU finance ministers last week unanimously backed the phasing out of funding of fossil fuel projects to help combat climate change.
A decision on funding was planned last month, but was postponed due to divisions within the bloc as some countries wanted gas funding to continue.
This prompted Mr McDowell to write a letter to the bank’s current 28 shareholders, the EU member states, on 5 November, suggesting pushing back the originally proposed end of fossil fuel lending from the end of 2020 to end of 2021, something the European Commission has lobbied for.
The EIB has ambitious goals on sustainable finance. Mr McDowell said the bank wants to “set the standard” for what it meant for banks to be aligned with the Paris climate agreement.
Protests against fossil fuels have intensified in recent years, with activists from groups such as Extinction Rebellion demanding governments take urgent action to slash carbon emissions and halt biodiversity loss.