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.
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.
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