The shift by BlackRock comes after criticism that the company has failed to use its platform to help curb climate change.
The climate crisis has put the firm "on the edge of a fundamental reshaping of finance," founder and CEO Laurence Fink said in his annual letter to chief executives.
Activists hailed it as a "significant move" for a business of its massive size and reach.
Mr Fink's New York firm oversees the management of about £5.38 trillion in funds and has branches in dozens of countries.
In his letter, Mr Fink said climate change had become the top concern of clients.
He said the immediate shift will impact everything from municipal bonds to home mortgages, as he begins exiting fossil fuel investments and asking clients to disclose climate-related risks.
By mid-2020, he aims to sell off stakes in companies that earn more than 25 per cent of their revenues from thermal coal production.
"Over time, companies and countries that do not respond to stakeholders and address sustainability risks will encounter growing scepticism from the markets, and in turn, a higher cost of capital," Mr Fink wrote.
Investments in exchange traded sustainable funds grew nearly 400 per cent in one year to $20 billion in 2019, according to data from analysts Morningstar.
Environmental activist Ben Cushing, from the U-S based environmental group Sierra Club, said the move was "a testament to the power of public pressure".
"As the biggest financial institution in the world, BlackRock's announcement today is a major step in the right direction," Mr Cushing said.
But the campaign manager at ShareAction, Jeanne Martin, urged BlackRock to back its words with more action.
"If BlackRock is serious about its commitment to phase out thermal coal, it should use its voting rights to get major coal financiers to do the same," Ms Martin said.