Greens minister Shane Rattenbury has broken ranks with his cabinet colleagues and called on the ACT government to divest its shares in the company behind the Maules Creek open-cut coalmine.
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Mr Rattenbury last week visited the Leard State Forest in north-west New South Wales, where Whitehaven Coal is planning the $767 million mine.
Land clearing is under way at the site and the first coal moving is expected to come as soon as January 2015.
The project has been a flashpoint for local campaigners and anti-coal protesters, including at Whitehaven's annual general meeting in Sydney last month.
Mr Rattenbury said the mine threatened more than 5000 hectares of forest.
"Leard Forest is home to 3421 hectares of nationally-listed and critically endangered Box-Gum Woodland, home to over 390 species, more than 30 of which are endangered.
"If this mine goes ahead, more than half the forest will be destroyed and the remainder will suffer from a major drop in the water table and pollution from coal dust."
Mr Rattenbury said the ACT government currently had holdings in 70 of the top 200 fossil fuel companies, representing more than $100 million in investments, including Whitehaven Coal.
He wrote to ACT Treasurer Andrew Barr to call for a freeze on new investments in fossil fuel companies and for the development of a plan to responsibly divest from fossil fuel companies within three years.
"I think it is unacceptable that the ACT government would invest in a company responsible for the destruction of thousands of hectares of endangered woodland and I am calling on the government to take action now," Mr Rattenbury said.
"Certainly the ACT government wouldn't allow such destructive development in the ACT, so I can't see why we should allow our funds to be used for such developments."
In his response Mr Barr said the government had made progress in implementing and applying its responsible investment policy framework.
Since its implementation in April, the framework has seen a reduction of about 18 per cent in the territory's exposure to the energy sector and about 10 per cent to the material sector, including mining activities.
"We acknowledge the potential impacts from the use of fossil fuels on the climate and this is supported by the government's ongoing commitment to increase renewable energy sources, reduce the reliance on fossil fuels and reduce carbon emissions," Mr Barr said.
"We also acknowledge that at the present time, fossil fuels continue to make a significant contribution to global energy requirements."
Mr Barr said he had been following recent debate about fossil fuel divestment and has asked for briefings on how more responsible investment can be promoted. He said the response was being actively managed and monitored.
350.org campaigner Josh Creaser welcomed the call for divestment from Whitehaven.
"We understand that it is going to take the government a bit of time to get its house in order to divest from all fossil fuels.
"We'd like to suggest Mr Barr should divest from Whitehaven as a gesture of goodwill and use that at as a first step in a broader divestment position from the government," he said.
Members of the group have previously met with members of Mr Barr's staff.
Whitehaven managing director Paul Flynn told the October 28 annual meeting that the high investment and carbon capture and storage technology made coal possibly "the only form of energy that can materially address the man-made contributions to climate change".
