The ISIF is worth €8.9bn (£7.9bn; $10.4bn), of which more than €300m is invested in oil, gas, coal and other fossil fuels, according to Ireland's Catholic development agency, Trócaire, which supported the bill.
The Republic of Ireland has never been top of the list when marking out countries that oppose fossil fuels.
The Irish government is set to completely divest its Ireland Strategic Investment Fund (ISIF) from companies with shares in the fossil fuel industry, in a groundbreaking bill approved by Irish parliament on Thursday, 12 July 2018.
The fossil fuel divestment movement has grown rapidly and trillions of dollars of investment funds have been divested, including large pension funds and insurers, cities such as NY, churches and universities.
Éamonn Meehan, executive director of Trócaire, an Irish charity, said: "Today the Oireachtas [the National parliament of Ireland] has made a powerful statement".
It was initially introduced by independent MP Thomas Pringle, followed by a long-running campaign led by Irish global development charity Trócaire.
The bill defines a fossil fuel company as a company that derives 20% or more of its revenue from exploration, extraction or refinement of fossil fuels.
The bill also said indirect investments should not be made, unless there is unlikely to be more than 15 per cent of an asset invested in a fossil fuel undertaking.
The new legislation is meant to help ensure Ireland meets its commitments under the Paris Agreement, which was the first deal to unite the global community in tackling climate change.
"This (bill) will make Ireland the first country to commit to divest (public money) from the fossil fuel industry", TD (Parliament member) Thomas Pringle, who first introduced the bill to Parliament in 2016, said.