diff --git a/pkg/loader/compose/v3.go b/pkg/loader/compose/v3.go
index 74c86492..be68bafa 100644
--- a/pkg/loader/compose/v3.go
+++ b/pkg/loader/compose/v3.go
@@ -29,8 +29,25 @@ import (
 	log "github.com/Sirupsen/logrus"
 	"github.com/kubernetes-incubator/kompose/pkg/kobject"
 	"github.com/pkg/errors"
+	"os"
 )
 
+// converts os.Environ() ([]string) to map[string]string
+// based on https://github.com/docker/cli/blob/5dd30732a23bbf14db1c64d084ae4a375f592cfa/cli/command/stack/deploy_composefile.go#L143
+func buildEnvironment() (map[string]string, error) {
+	env := os.Environ()
+	result := make(map[string]string, len(env))
+	for _, s := range env {
+		// if value is empty, s is like "K=", not "K".
+		if !strings.Contains(s, "=") {
+			return result, errors.Errorf("unexpected environment %q", s)
+		}
+		kv := strings.SplitN(s, "=", 2)
+		result[kv[0]] = kv[1]
+	}
+	return result, nil
+}
+
 // The purpose of this is not to deploy, but to be able to parse
 // v3 of Docker Compose into a suitable format. In this case, whatever is returned
 // by docker/cli's ServiceConfig
@@ -63,12 +80,17 @@ func parseV3(files []string) (kobject.KomposeObject, error) {
 		Config:   parsedComposeFile,
 	}
 
+	// get environment variables
+	env, err := buildEnvironment()
+	if err != nil {
+		return kobject.KomposeObject{}, errors.Wrap(err, "cannot build environment variables")
+	}
+
 	// Config details
-	// Environment is nil as docker/cli loads the appropriate environmental values itself
 	configDetails := types.ConfigDetails{
 		WorkingDir:  workingDir,
 		ConfigFiles: []types.ConfigFile{configFile},
-		Environment: nil,
+		Environment: env,
 	}
 
 	// Actual config
diff --git a/script/test/cmd/tests.sh b/script/test/cmd/tests.sh
index d7257a3d..d56afab3 100755
--- a/script/test/cmd/tests.sh
+++ b/script/test/cmd/tests.sh
@@ -274,6 +274,9 @@ convert::expect_success "kompose convert --stdout -j -f $KOMPOSE_ROOT/script/tes
 # Test environment variables are passed correctly
 convert::expect_success "kompose convert --stdout -j -f $KOMPOSE_ROOT/script/test/fixtures/v3/docker-compose-env.yaml" "$KOMPOSE_ROOT/script/test/fixtures/v3/output-env-k8s.json"
 
+# Test environment variables substitution
+convert::expect_success "kompose convert --stdout -j -f $KOMPOSE_ROOT/script/test/fixtures/v3/docker-compose-env-subs.yaml" "$KOMPOSE_ROOT/script/test/fixtures/v3/output-env-subs.json"
+
 # Test that two files that are different versions fail
 convert::expect_failure "kompose convert --stdout -j -f $KOMPOSE_ROOT/script/test/fixtures/v3/docker-compose.yaml -f $KOMPOSE_ROOT/script/test/fixtures/etherpad/docker-compose.yml"
 
diff --git a/script/test/fixtures/v3/docker-compose-env-subs.yaml b/script/test/fixtures/v3/docker-compose-env-subs.yaml
new file mode 100644
index 00000000..dc1bf711
--- /dev/null
+++ b/script/test/fixtures/v3/docker-compose-env-subs.yaml
@@ -0,0 +1,6 @@
+version: '3'
+services:
+  foo:
+    image: foo/bar:latest
+    environment:
+      FOO: $foo
diff --git a/script/test/fixtures/v3/output-env-subs.json b/script/test/fixtures/v3/output-env-subs.json
new file mode 100644
index 00000000..a81b9dd0
--- /dev/null
+++ b/script/test/fixtures/v3/output-env-subs.json
@@ -0,0 +1,74 @@
+{
+  "kind": "List",
+  "apiVersion": "v1",
+  "metadata": {},
+  "items": [
+    {
+      "kind": "Service",
+      "apiVersion": "v1",
+      "metadata": {
+        "name": "foo",
+        "creationTimestamp": null,
+        "labels": {
+          "io.kompose.service": "foo"
+        }
+      },
+      "spec": {
+        "ports": [
+          {
+            "name": "headless",
+            "port": 55555,
+            "targetPort": 0
+          }
+        ],
+        "selector": {
+          "io.kompose.service": "foo"
+        },
+        "clusterIP": "None"
+      },
+      "status": {
+        "loadBalancer": {}
+      }
+    },
+    {
+      "kind": "Deployment",
+      "apiVersion": "extensions/v1beta1",
+      "metadata": {
+        "name": "foo",
+        "creationTimestamp": null,
+        "labels": {
+          "io.kompose.service": "foo"
+        }
+      },
+      "spec": {
+        "replicas": 1,
+        "template": {
+          "metadata": {
+            "creationTimestamp": null,
+            "labels": {
+              "io.kompose.service": "foo"
+            }
+          },
+          "spec": {
+            "containers": [
+              {
+                "name": "foo",
+                "image": "foo/bar:latest",
+                "env": [
+                  {
+                    "name": "FOO",
+                    "value": "bar"
+                  }
+                ],
+                "resources": {}
+              }
+            ],
+            "restartPolicy": "Always"
+          }
+        },
+        "strategy": {}
+      },
+      "status": {}
+    }
+  ]
+}