diff --git a/pkg/libstack/compose/composeplugin.go b/pkg/libstack/compose/composeplugin.go
index f2d898dc2..8534a122d 100644
--- a/pkg/libstack/compose/composeplugin.go
+++ b/pkg/libstack/compose/composeplugin.go
@@ -71,27 +71,20 @@ func withComposeService(
 		composeService := compose.NewComposeService(cli)
 
 		configDetails := types.ConfigDetails{
-			WorkingDir:  options.WorkingDir,
-			Environment: make(map[string]string),
+			WorkingDir: options.WorkingDir,
 		}
 
 		for _, p := range filePaths {
 			configDetails.ConfigFiles = append(configDetails.ConfigFiles, types.ConfigFile{Filename: p})
 		}
 
-		envFile := make(map[string]string)
-
-		if options.EnvFilePath != "" {
-			env, err := dotenv.GetEnvFromFile(make(map[string]string), []string{options.EnvFilePath})
-			if err != nil {
-				return fmt.Errorf("unable to get the environment from the env file: %w", err)
-			}
-
-			maps.Copy(envFile, env)
-
-			configDetails.Environment = env
+		env, err := parseEnvironment(options)
+		if err != nil {
+			return err
 		}
 
+		configDetails.Environment = env
+
 		if len(configDetails.ConfigFiles) == 0 {
 			return composeFn(composeService, nil)
 		}
@@ -263,3 +256,29 @@ func addServiceLabels(project *types.Project, oneOff bool) {
 		project.Services[i] = s
 	}
 }
+
+func parseEnvironment(options libstack.Options) (map[string]string, error) {
+	env := make(map[string]string)
+
+	for _, envLine := range options.Env {
+		e, err := dotenv.UnmarshalWithLookup(envLine, nil)
+		if err != nil {
+			return nil, fmt.Errorf("unable to parse environment variables: %w", err)
+		}
+
+		maps.Copy(env, e)
+	}
+
+	if options.EnvFilePath == "" {
+		return env, nil
+	}
+
+	e, err := dotenv.GetEnvFromFile(make(map[string]string), []string{options.EnvFilePath})
+	if err != nil {
+		return nil, fmt.Errorf("unable to get the environment from the env file: %w", err)
+	}
+
+	maps.Copy(env, e)
+
+	return env, nil
+}
diff --git a/pkg/libstack/compose/composeplugin_test.go b/pkg/libstack/compose/composeplugin_test.go
index 524da987a..9f56e1c3b 100644
--- a/pkg/libstack/compose/composeplugin_test.go
+++ b/pkg/libstack/compose/composeplugin_test.go
@@ -142,6 +142,7 @@ func Test_Config(t *testing.T) {
 		composeFileContent string
 		expectFileContent  string
 		envFileContent     string
+		env                []string
 	}{
 		{
 			name: "compose file with relative path",
@@ -173,7 +174,6 @@ networks:
   default:
     name: configtest_default
 `,
-			envFileContent: "",
 		},
 		{
 			name: "compose file with absolute path",
@@ -205,7 +205,6 @@ networks:
   default:
     name: configtest_default
 `,
-			envFileContent: "",
 		},
 		{
 			name: "compose file with declared volume",
@@ -243,7 +242,6 @@ volumes:
     name: configtest_nginx-data
     driver: local
 `,
-			envFileContent: "",
 		},
 		{
 			name: "compose file with relative path environment variable placeholder",
@@ -254,6 +252,7 @@ volumes:
       - 8019:80
     volumes:
       - ${WEB_HOME}:/usr/share/nginx/html/
+      - ./config/${CONFIG_DIR}:/tmp/config
     env_file:
       - stack.env
 `,
@@ -276,11 +275,17 @@ services:
         target: /usr/share/nginx/html
         bind:
           create_host_path: true
+      - type: bind
+        source: ./config/something
+        target: /tmp/config
+        bind:
+          create_host_path: true
 networks:
   default:
     name: configtest_default
 `,
 			envFileContent: `WEB_HOME=./html`,
+			env:            []string{"CONFIG_DIR=something"},
 		},
 		{
 			name: "compose file with absolute path environment variable placeholder",
@@ -294,7 +299,6 @@ networks:
     env_file:
       - stack.env
 `,
-
 			expectFileContent: `name: configtest
 services:
   nginx:
@@ -336,6 +340,7 @@ networks:
 				WorkingDir:    dir,
 				ProjectName:   projectName,
 				EnvFilePath:   envFilePath,
+				Env:           tc.env,
 				ConfigOptions: []string{"--no-path-resolution"},
 			})
 			require.NoError(t, err)