diff --git a/package.json b/package.json
index 145df3d7839..788cc9872d7 100644
--- a/package.json
+++ b/package.json
@@ -1,7 +1,7 @@
 {
   "name": "code-oss-dev",
   "version": "1.55.0",
-  "distro": "0357427beb5cd348177cd1ed381cd740082966c4",
+  "distro": "01f21bd70c49582992ba219c57b78d1c94bb5da7",
   "author": {
     "name": "Microsoft Corporation"
   },
diff --git a/src/vs/base/node/shell.ts b/src/vs/base/node/shell.ts
index cacc2da4db2..98861c0dd07 100644
--- a/src/vs/base/node/shell.ts
+++ b/src/vs/base/node/shell.ts
@@ -13,7 +13,7 @@ import * as processes from 'vs/base/node/processes';
  * shell that the terminal uses by default.
  * @param p The platform to detect the shell of.
  */
-export async function getSystemShell(p: platform.Platform, env = process.env as platform.IProcessEnvironment): Promise<string> {
+export async function getSystemShell(p: platform.Platform, env: platform.IProcessEnvironment): Promise<string> {
 	if (p === platform.Platform.Windows) {
 		if (platform.isWindows) {
 			return getSystemShellWindows();
@@ -25,7 +25,7 @@ export async function getSystemShell(p: platform.Platform, env = process.env as
 	return getSystemShellUnixLike(p, env);
 }
 
-export function getSystemShellSync(p: platform.Platform, env = process.env as platform.IProcessEnvironment): string {
+export function getSystemShellSync(p: platform.Platform, env: platform.IProcessEnvironment): string {
 	if (p === platform.Platform.Windows) {
 		if (platform.isWindows) {
 			return getSystemShellWindowsSync(env);
diff --git a/src/vs/platform/environment/node/shellEnv.ts b/src/vs/platform/environment/node/shellEnv.ts
index 9454f1d4730..c2d7594b124 100644
--- a/src/vs/platform/environment/node/shellEnv.ts
+++ b/src/vs/platform/environment/node/shellEnv.ts
@@ -79,7 +79,7 @@ async function doResolveUnixShellEnv(logService: ILogService): Promise<typeof pr
 		logService.trace('getUnixShellEnvironment#env', env);
 		logService.trace('getUnixShellEnvironment#spawn', command);
 
-		const systemShellUnix = await getSystemShell(platform);
+		const systemShellUnix = await getSystemShell(platform, env);
 		const child = spawn(systemShellUnix, ['-ilc', command], {
 			detached: true,
 			stdio: ['ignore', 'pipe', process.stderr],
diff --git a/src/vs/workbench/api/node/extHostTerminalService.ts b/src/vs/workbench/api/node/extHostTerminalService.ts
index d2b9958bfbd..a799d988111 100644
--- a/src/vs/workbench/api/node/extHostTerminalService.ts
+++ b/src/vs/workbench/api/node/extHostTerminalService.ts
@@ -41,7 +41,7 @@ export class ExtHostTerminalService extends BaseExtHostTerminalService {
 		// Getting the SystemShell is an async operation, however, the ExtHost terminal service is mostly synchronous
 		// and the API `vscode.env.shell` is also synchronous. The default shell _should_ be set when extensions are
 		// starting up but if not, we run getSystemShellSync below which gets a sane default.
-		getSystemShell(platform.platform).then(s => this._defaultShell = s);
+		getSystemShell(platform.platform, process.env as platform.IProcessEnvironment).then(s => this._defaultShell = s);
 
 		this._updateLastActiveWorkspace();
 		this._updateVariableResolver();
@@ -83,7 +83,7 @@ export class ExtHostTerminalService extends BaseExtHostTerminalService {
 		return terminalEnvironment.getDefaultShell(
 			fetchSetting,
 			this._isWorkspaceShellAllowed,
-			this._defaultShell ?? getSystemShellSync(platform.platform),
+			this._defaultShell ?? getSystemShellSync(platform.platform, process.env as platform.IProcessEnvironment),
 			process.env.hasOwnProperty('PROCESSOR_ARCHITEW6432'),
 			process.env.windir,
 			terminalEnvironment.createVariableResolver(this._lastActiveWorkspace, this._variableResolver),
diff --git a/src/vs/workbench/contrib/terminal/electron-browser/terminal.contribution.ts b/src/vs/workbench/contrib/terminal/electron-browser/terminal.contribution.ts
index 0c11faaf0b3..6b8955477c1 100644
--- a/src/vs/workbench/contrib/terminal/electron-browser/terminal.contribution.ts
+++ b/src/vs/workbench/contrib/terminal/electron-browser/terminal.contribution.ts
@@ -13,6 +13,8 @@ import { IConfigurationRegistry, Extensions } from 'vs/platform/configuration/co
 import { getTerminalShellConfiguration } from 'vs/workbench/contrib/terminal/common/terminalConfiguration';
 import { LifecyclePhase } from 'vs/workbench/services/lifecycle/common/lifecycle';
 import { getSystemShell } from 'vs/base/node/shell';
+import { process } from 'vs/base/parts/sandbox/electron-sandbox/globals';
+import { Platform } from 'vs/base/common/platform';
 
 // This file contains additional desktop-only contributions on top of those in browser/
 
@@ -25,4 +27,5 @@ workbenchRegistry.registerWorkbenchContribution(TerminalNativeContribution, Life
 // Register configurations
 const configurationRegistry = Registry.as<IConfigurationRegistry>(Extensions.Configuration);
 
-getTerminalShellConfiguration(getSystemShell).then(config => configurationRegistry.registerConfiguration(config));
+const systemShell = async (p: Platform) => getSystemShell(p, await process.getShellEnv());
+getTerminalShellConfiguration(systemShell).then(config => configurationRegistry.registerConfiguration(config));
diff --git a/src/vs/workbench/contrib/terminal/electron-browser/terminalInstanceService.ts b/src/vs/workbench/contrib/terminal/electron-browser/terminalInstanceService.ts
index 32673f92f70..facc10fc01b 100644
--- a/src/vs/workbench/contrib/terminal/electron-browser/terminalInstanceService.ts
+++ b/src/vs/workbench/contrib/terminal/electron-browser/terminalInstanceService.ts
@@ -13,6 +13,7 @@ import { IStorageService, StorageScope } from 'vs/platform/storage/common/storag
 import { IWorkspaceContextService } from 'vs/platform/workspace/common/workspace';
 import { getMainProcessParentEnv } from 'vs/workbench/contrib/terminal/node/terminalEnvironment';
 import { IConfigurationResolverService } from 'vs/workbench/services/configurationResolver/common/configurationResolver';
+import { IShellEnvironmentService } from 'vs/workbench/services/environment/electron-sandbox/shellEnvironmentService';
 import { IHistoryService } from 'vs/workbench/services/history/common/history';
 import type { Terminal as XTermTerminal } from 'xterm';
 import type { SearchAddon as XTermSearchAddon } from 'xterm-addon-search';
@@ -34,7 +35,8 @@ export class TerminalInstanceService extends Disposable implements ITerminalInst
 		@IConfigurationResolverService private readonly _configurationResolverService: IConfigurationResolverService,
 		@IWorkspaceContextService private readonly _workspaceContextService: IWorkspaceContextService,
 		@IHistoryService private readonly _historyService: IHistoryService,
-		@ILogService private readonly _logService: ILogService
+		@ILogService private readonly _logService: ILogService,
+		@IShellEnvironmentService private readonly _shellEnvironmentService: IShellEnvironmentService
 	) {
 		super();
 	}
@@ -76,10 +78,11 @@ export class TerminalInstanceService extends Disposable implements ITerminalInst
 		const activeWorkspaceRootUri = this._historyService.getLastActiveWorkspaceRoot();
 		let lastActiveWorkspace = activeWorkspaceRootUri ? this._workspaceContextService.getWorkspaceFolder(activeWorkspaceRootUri) : undefined;
 		lastActiveWorkspace = lastActiveWorkspace === null ? undefined : lastActiveWorkspace;
+
 		const shell = getDefaultShell(
 			(key) => this._configurationService.inspect(key),
 			isWorkspaceShellAllowed,
-			await getSystemShell(platformOverride),
+			await getSystemShell(platformOverride, await this._shellEnvironmentService.getShellEnv()),
 			process.env.hasOwnProperty('PROCESSOR_ARCHITEW6432'),
 			process.env.windir,
 			createVariableResolver(lastActiveWorkspace, this._configurationResolverService),
@@ -87,6 +90,7 @@ export class TerminalInstanceService extends Disposable implements ITerminalInst
 			useAutomationShell,
 			platformOverride
 		);
+
 		const args = getDefaultShellArgs(
 			(key) => this._configurationService.inspect(key),
 			isWorkspaceShellAllowed,
@@ -95,6 +99,7 @@ export class TerminalInstanceService extends Disposable implements ITerminalInst
 			this._logService,
 			platformOverride
 		);
+
 		return Promise.resolve({ shell, args });
 	}