Aims Functional group composition of a plant community is mainly driven by environmental factors and is one of the main determinants of grassland biodiversity and productivity. Therefore, it is important to understand the role of plant functional groups (PFGs) in mediating the impact of environmental conditions on ecosystem functions and biodiversity. Methods We measured plant biomass and species richness of grasslands in 65 sites on the Mongolian Plateau and classified 157 perennial herbaceous plants into two main PFGs (namely grasses and forbs). Using the Random Forest Model and ordinary least squares regression, we identified that environmental factors (i.e., aridity index, soil total nitrogen and pH) were significantly related to the species richness and aboveground biomass of PFGs. We then used structural equation modeling to explore the relationship between the identified environmental factors and community species richness and biomass, and the role of PFGs in driving this relationship. Important Findings We found that aridity index had unimodal relationships with both aboveground biomass and species richness of the PFGs and the whole community. All species richness and biomass metrics were significantly related to soil total nitrogen and pH. The relationship between aridity index and community biomass was mediated by an increase in the aboveground biomass of grasses. The influence of soil total nitrogen and pH on community species richness was mainly due to their regulation in the species richness of forbs. Our results indicate that community composition and the identity of the PFGs play a key role in linking environmental factors to ecosystem functioning.