More than 20 countries and financial institutions will halt all financing for fossil fuel development overseas and divert the spending to green energy instead from next year.

The move marks a significant boost for the transition to clean fuels. The countries affected include the US, UK, Denmark and some developing countries that would receive such finance, including Costa Rica. The European Investment Bank is one of the financial institutions involved.

Diverting their funding from fossil fuels to low-carbon efforts will generate an estimated $8bn a year around the world for clean energy. The agreement will prevent the funding of any fossil fuel development, including gas, though there are provisions for loopholes.

However, China and Japan, two big funders of fossil fuel development around the world, have shunned the initiative.

The countries involved will also be able to continue developing their own fossil fuel resources at home, including oil and gas fields.

The US has at least 24 pending fossil fuel projects representing more than 1.6 gigatons of potential greenhouse gas emissions. The UK is licensing new oil and gas fields in the North Sea, despite hosting the Cop26 climate summit in Glasgow.

The UK will also be able to press ahead with funding a controversial gasfield in Mozambique, because that project is already in the pipeline and the initiative covers only new investments. Funding for fossil fuels from private sources will also not be affected by the agreement.

The move also builds on the UK’s efforts to end the overseas financing of coal, as president of the G7 this year as well as host of Cop26.

The G7 agreed in May to stop funding coal development overseas, despite resistance from Japan, and China – one of the biggest funders of coal development around the world.

Collin Rees, the programme manager at the Oil Change International campaign group, said the initiative, which will be made public on Thursday when the Cop26 summit is focusing on energy issues, would mark a major change in outlook for fossil fuel investment around the world.

He said: “This is a massive step forward. This represents a serious chunk of the current international public finance for fossil fuels. It’s a really big thing, though there may be some devil in the detail.”

Rees pointed to the advice of the International Energy Agency, published in May, that found all new development of fossil fuel resources globally must end after this year if the world was to limit global heating to 1.5C above pre-industrial levels.

“This move is significant in light of the IEA report,” he said.