VS Code's integrated terminal populates environment variables on startup by sourcing the shell configuration files relevant to the terminal's shell type (e.g., Bash, Zsh, PowerShell). When you open the terminal, it executes the startup files like .bashrc or .zshrc (on Unix-based systems) or $PROFILE (on Windows for PowerShell). These files define environment variables, including custom paths, user-specific variables, or system-wide configurations. VS Code also provides the ability to customize environment variables specifically for the integrated terminal through settings in settings.json or by using the terminal.integrated.env.* settings to ensure a tailored environment that can differ from the system's global environment.