The World Council of Churches, representing 345 churches, said the decision was made for ethical reasons.
"The committee discussed the ethical investment criteria, and considered that the list of sectors in which the WCC does not invest should be extended to include fossil fuels," the group's finance committee said in a report.
Environmental campaigner Bill McKibben of 350.org hailed the decision as a "remarkable moment".
"The World Council of Churches reminds us that morality demands thinking as much about the future as about ourselves–and that there’s no threat to the future greater than the unchecked burning of fossil fuels," he said in a statement.
"This is a remarkable moment for the 590 million Christians in its member denominations: a huge percentage of humanity says today 'this far and no further'."
It is unclear whether the World Council of Churches' position will apply to its member organisations, with the Church of England yet to make an official comment on the development.
While the World Council of Churches financial assets are not relatively large, the Church of England holds investments worth $A10 billion (£5.5 billion).
Other environmental campaigners said the move could encourage other religious organisations to follow suit.
Other churches have individually joined the fossil fuel divestment movement including the Anglican Church of Australia and Uniting Church in Australia.
In the US, religious institutions have done likewise including the Unitarian Universalist Association, the United Church of Christ and the Union Theological Seminary.
UN climate change official Christiana Figueres appealed to religious leaders earlier this year to take a leadership position on climate change.
"It is time for faith groups and religious institutions to find their voice and set their moral compass on one of the great humanitarian issues of our time. Overcoming poverty, caring for the sick and the infirm, feeding the hungry and a whole range of other faith-based concerns will only get harder in a climate challenged world," she told an audience at St Paul's Cathedral in London in May.