Need help understanding how VSCode processes environment variables

I have always had issues understanding how VSCode process environment variables on Windows. Currently, I am trying to integrate Cmder with VSCode as my shell using the json below that I found on Github:

"terminal.integrated.shell.windows": "cmd.exe",

  "terminal.integrated.env.windows": {
  "CMDER_ROOT": "[cmder_root]"
  },
  "terminal.integrated.shellArgs.windows": [
    "/k",
    "%CMDER_ROOT%\\vendor\\bin\\vscode_init.cmd"
  ],

I was trying to replace "[cmder_root]" with a variable defined in the OS but cannot get VSCode to recognize it. When I create the variable as a System variable, if I run set at the cmd.exe prompt of the integrated terminal, it shows the new variable name and the value I set it to but VSCode won't use it because it will not start Cmder when I open a terminal.

If I define the variable in the OS as User variable, running set inside the integrated terminal no longer displays that variable with the value I set it to. It displays it as CMDER_ROOT=%CMDER_ROOT%.

I finally got Cmder to work by hard coding the path in the settings.json file but it just made me want to find out what I am doing wrong.