Cabinet approved the ban late last month, and also agreed to use its clout as a voting shareholder more often to ensure that its $2.3 billion superannuation fund was invested ''responsibly''.

However, Treasurer Andrew Barr said Labor would oppose a Greens bill this week that would extend the ban to companies that relied on sweatshops or child labour, and to businesses that tested cosmetics on animals.

ACT Labor's decision precedes a Senate committee report, to be issued this week, on a similar plan to prevent the federal Future Fund from investing in tobacco, mines and nuclear weapons.

ACT Greens leader Meredith Hunter welcomed the ''big step'', saying it was the result of years of campaigning by her party.

However, she was disappointed Labor would not support the Greens' legislation.

''I'm particularly perplexed as to why it won't exclude businesses that breach labour conventions,'' she said. ''Australia has signed up to these conventions, and the ACT is a human rights jurisdiction. This government keeps telling us it takes these things very seriously.''

Last year, the ACT Treasury had about $20 million invested in tobacco firms, and another $20 million with arms manufacturers that make cluster bombs.

Australia recently banned the weapons, which, like land mines, kill and maim more citizens than they do soldiers.

In 2007, The Canberra Times revealed that the money set aside to pay ACT public servants' super pensions was invested in a range of industries that were arguably morally questionable, such as companies that made cigarettes, poker machines and nuclear weapons.

In response, the ACT government became Australia's first to adopt the United Nations' principles on responsible investment.

However, it didn't sell any shares as a result of this policy shift, nor did it use its votes at annual general meetings to encourage companies to be more environmentally or socially responsible.

The government's latest policy was developed after an Assembly inquiry last year rejected a Greens plan to ban investment in a range of companies, including those that profited from alcohol, genetically modified crops, caged-animal farm products, coal and crude oil.

The Greens have since narrowed their proposal, but Mr Barr said yesterday Labor's policy was cheaper and simpler to manage.

''The proposed Greens legislation is quite prescriptive and would involve the setting up of an extensive bureaucracy to administer investments for limited gain,'' Mr Barr said.

He said it was right to stop investing public money in tobacco, cluster bombs and land mines, as they ''create particularly harmful outcomes''.

''Tobacco is the only legal product that if used as intended will kill you. Land mines and cluster bombs are indiscriminantly harmful in their impact, notably to civilians.''

Treasury will maintain its long-term investment return target of 5 per cent a year above inflation.

However, Mr Barr said a responsible investment policy ''balances the need for proper returns with good governance and corporate practices''.

Last month, the federal Finance Department warned the Senate that adopting a ban on certain types of companies could add ''significant costs'' to the Future Fund's budget.

However, former federal health minister Nicola Roxon, who is now Attorney-General, has expressed her support for an investment ban on businesses that make cigarettes.

The Future Fund holds about $250 million worth of shares in tobacco companies.