Despite being one of the most abundant natural polymers, lignin from paper mills and biorefinery processes is primarily used as a low-cost energy source; however, its utilization in value-added products remains limited. To address this issue, a novel strategy was developed for valorizing lignin as a multifunctional compatibilizer for biodegradable poly(lactic acid)/poly(butylene adipate-co-terephthalate) (PLA/PBAT, 80/20 wt%) blends, enhancing both the interfacial compatibility and functional performance. A lignin-based multifunctional compatibilizer (LigSG) was synthesized by grafting styrene and glycidyl methacrylate (GMA) onto lignin. LigSG contains reactive functional groups that enable preferential localization at the PLA/PBAT interface, thereby enhancing the interfacial adhesion. By incorporating LigSG at varying loadings (1, 5, and 10 phr), the morphology, mechanical properties, rheological behavior, and functional properties of the blends were successfully modulated. The domain size of PBAT dispersed in the blend containing LigSG was smaller, leading to enhanced tensile strength and an increase in the elongation at break compared to those of the uncompatibilized blend. The complex viscosity and interphase relaxation time increased, as revealed by rheological analysis, indicating stronger interfacial interactions. LigSG significantly enhanced the UV shielding ability of the blends, effectively reducing the transmittance in the UV region and preventing polymer degradation over time. The LigSG-containing blend exhibited enhanced water-barrier properties, demonstrating its dual role as a compatibilizer and functional additive. These findings highlight the potential of valorizing lignin for developing high-performance biodegradable polymer blends, enabling sustainable and high-value applications of lignin in eco-friendly packaging and material engineering.