Most of the new $400 million investment will be spent on finding more sustainable materials for products and packaging, and implementing the changes, the company said.
Lego uses around 90,000 tons of plastic each year but since 2018 has utilized bio-polyethylene, a type of plastic made from ethanol, produced using sugarcane.
Pressure has been mounting on the company to reduce its plastic packaging particularly since sales and profits rose during the coronavirus pandemic.
The material does not work as well for the standard hard bricks that are still made from oil-based plastic.
The company also announced a new ambition to help eight million children to learn through play around the world each year in collaboration with the Lego Foundation and external organisations, such as UNICEF and Save the Children.
The LEGO Group CEO, Niels B Christiansen said: "We can not lose sight of the fundamental challenges facing future generations". A series of initiatives will give children in need access to play and opportunities to develop life-long skills such as problem solving, collaboration, and communication. We will step up our efforts to use our resources, networks, expertise and platforms to make a positive difference.
"We have received many letters from children about the environment asking us to remove single-use plastic packaging", Lego CEO Niels B Christiansen said in the statement.
Lego said on Tuesday that it plans to stop using plastic bags inside of box sets and replace them with paper ones.
"Children liked the paper bags being trialled in 2021 as they were environmentally friendly and easy to open", Mr Christiansen added.
For the last five years a team of 150 engineers and scientists have been testing plant-based and recycled materials to see if they're suitable to use in the making of Lego bricks. About 2 percent of its pieces, such as Lego trees and bushes, are made of sugar cane.
Programmes to encourage the reuse of Lego have seen bricks donated to over 23,000 children in the US.
Big Question: Who invented LEGO and when? Some progress has been made, but the vast majority of individual pieces are still made with plastic.