How does VS Code integrated terminal populate environment variables on startup?

Please, find below a few environment variables I can see in the VS Code integrated git-bash:

~$ for var in PSMODULEPATH LIB LIBPATH INCLUDE EXTERNAL_INCLUDE ORIGINAL_PATH PATH; do echo "\${#$var} = $(eval echo \${#$var})"; done
${#PSMODULEPATH} = 450
${#LIB} = 176
${#LIBPATH} = 173
${#INCLUDE} = 387
${#EXTERNAL_INCLUDE} = 387
${#ORIGINAL_PATH} = 7555
${#PATH} = 9683

~$

Now, if I run the same command on the standalone git-bash console I get this:

~$ for var in PSMODULEPATH LIB LIBPATH INCLUDE EXTERNAL_INCLUDE ORIGINAL_PATH PATH; do echo "\${#$var} = $(eval echo \${#$var})"; done
${#PSMODULEPATH} = 0
${#LIB} = 0
${#LIBPATH} = 0
${#INCLUDE} = 0
${#EXTERNAL_INCLUDE} = 0
${#ORIGINAL_PATH} = 0
${#PATH} = 2228

~$

I know 100% that both terminals are git-bash and they do evaluate the ~/.bashrc file. Both return the same thing for echo $0 or for the different $BASH_XYZ variables.

However, something additional happens in VS Code. It adds all kinds of environment variables and seems to botch the PATH environment variable royally. In my standalone git-bash:

~$ echo $PATH | grep ';'

~$

But in VS Code:

~$ echo $PATH | grep ';' | wc -c
9684

~$

This is all very weird. And it breaks the xargs command.

My question is - what does VS Code do exactly to populate the git bash environment and how can we make it behave sanely?