diff --git a/commit-graph.c b/commit-graph.c
index 9abe62bd5a..0820cf5fb8 100644
--- a/commit-graph.c
+++ b/commit-graph.c
@@ -740,13 +740,13 @@ static struct commit_graph *prepare_commit_graph(struct repository *r)
 	struct odb_source *source;
 
 	/*
-	 * Early return if there is no git dir or if the commit graph is
+	 * Early return if there is no object database or if the commit graph is
 	 * disabled.
 	 *
 	 * This must come before the "already attempted?" check below, because
 	 * we want to disable even an already-loaded graph file.
 	 */
-	if (!r->gitdir || r->commit_graph_disabled)
+	if (!r->objects || r->commit_graph_disabled)
 		return NULL;
 
 	if (r->objects->commit_graph_attempted)
diff --git a/environment.h b/environment.h
index 9eb97b3869..ccfcf37bfb 100644
--- a/environment.h
+++ b/environment.h
@@ -130,13 +130,6 @@ void repo_config_values_init(struct repo_config_values *cfg);
  * `the_repository`. We should eventually get rid of these and make the
  * dependency on a repository explicit:
  *
- *   - `setup_git_env()` ideally shouldn't exist as it modifies global state,
- *     namely the environment. The current process shouldn't ever access that
- *     state via envvars though, but should instead consult a `struct
- *     repository`. When spawning new processes, we would ideally also pass a
- *     `struct repository` and then set up the environment variables for the
- *     child process, only.
- *
  *   - `have_git_dir()` should not have to exist at all. Instead, we should
  *     decide on whether or not we have a `struct repository`.
  *
@@ -147,6 +140,7 @@ void repo_config_values_init(struct repo_config_values *cfg);
  * Please do not add new global config variables here.
  */
 # ifdef USE_THE_REPOSITORY_VARIABLE
+
 /*
  * Returns true iff we have a configured git repository (either via
  * setup_git_directory, or in the environment via $GIT_DIR).
diff --git a/refs.c b/refs.c
index 7c71f8300d..d3caa9a633 100644
--- a/refs.c
+++ b/refs.c
@@ -126,7 +126,8 @@ struct ref_namespace_info ref_namespace[] = {
 		 * points to the content of another. Unlike the other
 		 * ref namespaces, this one can be changed by the
 		 * GIT_REPLACE_REF_BASE environment variable. This
-		 * .namespace value will be overwritten in setup_git_env().
+		 * .namespace value will be overwritten during repository
+		 * setup.
 		 */
 		.ref = "refs/replace/",
 		.decoration = DECORATION_GRAFTED,
diff --git a/repository.c b/repository.c
index db57b8308b..187dd471c4 100644
--- a/repository.c
+++ b/repository.c
@@ -181,12 +181,6 @@ void repo_set_gitdir(struct repository *repo,
 	free(old_gitdir);
 
 	repo_set_commondir(repo, o->commondir);
-
-	if (!repo->objects)
-		repo->objects = odb_new(repo, o->object_dir, o->alternate_db);
-	else if (!o->skip_initializing_odb)
-		BUG("cannot reinitialize an already-initialized object directory");
-
 	repo->disable_ref_updates = o->disable_ref_updates;
 
 	expand_base_dir(&repo->graft_file, o->graft_file,
@@ -262,8 +256,8 @@ void repo_set_worktree(struct repository *repo, const char *path)
 	trace2_def_repo(repo);
 }
 
-static int read_and_verify_repository_format(struct repository_format *format,
-					     const char *commondir)
+static int read_repository_format_from_commondir(struct repository_format *format,
+						 const char *commondir)
 {
 	int ret = 0;
 	struct strbuf sb = STRBUF_INIT;
@@ -272,11 +266,6 @@ static int read_and_verify_repository_format(struct repository_format *format,
 	read_repository_format(format, sb.buf);
 	strbuf_reset(&sb);
 
-	if (verify_repository_format(format, &sb) < 0) {
-		warning("%s", sb.buf);
-		ret = -1;
-	}
-
 	strbuf_release(&sb);
 	return ret;
 }
@@ -290,6 +279,8 @@ int repo_init(struct repository *repo,
 	      const char *worktree)
 {
 	struct repository_format format = REPOSITORY_FORMAT_INIT;
+	struct strbuf err = STRBUF_INIT;
+
 	memset(repo, 0, sizeof(*repo));
 
 	initialize_repository(repo);
@@ -297,33 +288,24 @@ int repo_init(struct repository *repo,
 	if (repo_init_gitdir(repo, gitdir))
 		goto error;
 
-	if (read_and_verify_repository_format(&format, repo->commondir))
+	if (read_repository_format_from_commondir(&format, repo->commondir))
 		goto error;
 
-	repo_set_hash_algo(repo, format.hash_algo);
-	repo_set_compat_hash_algo(repo, format.compat_hash_algo);
-	repo_set_ref_storage_format(repo, format.ref_storage_format,
-				    format.ref_storage_payload);
-	repo->repository_format_worktree_config = format.worktree_config;
-	repo->repository_format_relative_worktrees = format.relative_worktrees;
-	repo->repository_format_precious_objects = format.precious_objects;
-	repo->repository_format_submodule_path_cfg = format.submodule_path_cfg;
-
-	/* take ownership of format.partial_clone */
-	repo->repository_format_partial_clone = format.partial_clone;
-	format.partial_clone = NULL;
+	if (apply_repository_format(repo, &format, 0, &err) < 0) {
+		warning("%s", err.buf);
+		goto error;
+	}
 
 	if (worktree)
 		repo_set_worktree(repo, worktree);
 
-	if (repo->compat_hash_algo)
-		repo_read_loose_object_map(repo);
-
 	clear_repository_format(&format);
+	strbuf_release(&err);
 	return 0;
 
 error:
 	clear_repository_format(&format);
+	strbuf_release(&err);
 	repo_clear(repo);
 	return -1;
 }
diff --git a/repository.h b/repository.h
index c3ec0f4b79..36e2db2633 100644
--- a/repository.h
+++ b/repository.h
@@ -221,12 +221,9 @@ const char *repo_get_work_tree(struct repository *repo);
  */
 struct set_gitdir_args {
 	const char *commondir;
-	const char *object_dir;
 	const char *graft_file;
 	const char *index_file;
-	const char *alternate_db;
 	bool disable_ref_updates;
-	bool skip_initializing_odb;
 };
 
 void repo_set_gitdir(struct repository *repo, const char *root,
diff --git a/setup.c b/setup.c
index 075bf89fa9..b4652651df 100644
--- a/setup.c
+++ b/setup.c
@@ -750,8 +750,7 @@ static int check_repo_format(const char *var, const char *value,
 	return read_worktree_config(var, value, ctx, vdata);
 }
 
-static int check_repository_format_gently(struct repository *repo,
-					  const char *gitdir,
+static int check_repository_format_gently(const char *gitdir,
 					  struct repository_format *candidate,
 					  int *nongit_ok)
 {
@@ -765,7 +764,7 @@ static int check_repository_format_gently(struct repository *repo,
 	strbuf_release(&sb);
 
 	/*
-	 * For historical use of check_repository_format() in git-init,
+	 * For historical use of check_and_apply_repository_format() in git-init,
 	 * we treat a missing config as a silent "ok", even when nongit_ok
 	 * is unset.
 	 */
@@ -782,8 +781,6 @@ static int check_repository_format_gently(struct repository *repo,
 		die("%s", err.buf);
 	}
 
-	repo->repository_format_precious_objects = candidate->precious_objects;
-
 	string_list_clear(&candidate->unknown_extensions, 0);
 	string_list_clear(&candidate->v1_only_extensions, 0);
 
@@ -1038,8 +1035,7 @@ cleanup_return:
 }
 
 static void setup_git_env_internal(struct repository *repo,
-				   const char *git_dir,
-				   bool skip_initializing_odb)
+				   const char *git_dir)
 {
 	char *git_replace_ref_base;
 	const char *shallow_file;
@@ -1048,13 +1044,10 @@ static void setup_git_env_internal(struct repository *repo,
 	struct strvec to_free = STRVEC_INIT;
 
 	args.commondir = getenv_safe(&to_free, GIT_COMMON_DIR_ENVIRONMENT);
-	args.object_dir = getenv_safe(&to_free, DB_ENVIRONMENT);
 	args.graft_file = getenv_safe(&to_free, GRAFT_ENVIRONMENT);
 	args.index_file = getenv_safe(&to_free, INDEX_ENVIRONMENT);
-	args.alternate_db = getenv_safe(&to_free, ALTERNATE_DB_ENVIRONMENT);
 	if (getenv(GIT_QUARANTINE_ENVIRONMENT))
 		args.disable_ref_updates = true;
-	args.skip_initializing_odb = skip_initializing_odb;
 
 	repo_set_gitdir(repo, git_dir, &args);
 	strvec_clear(&to_free);
@@ -1074,15 +1067,10 @@ static void setup_git_env_internal(struct repository *repo,
 		fetch_if_missing = 0;
 }
 
-static void setup_git_env(struct repository *repo, const char *git_dir)
-{
-	setup_git_env_internal(repo, git_dir, false);
-}
-
-static void set_git_dir_1(struct repository *repo, const char *path, bool skip_initializing_odb)
+static void set_git_dir_1(struct repository *repo, const char *path)
 {
 	xsetenv(GIT_DIR_ENVIRONMENT, path, 1);
-	setup_git_env_internal(repo, path, skip_initializing_odb);
+	setup_git_env_internal(repo, path);
 }
 
 static void update_relative_gitdir(const char *name UNUSED,
@@ -1096,7 +1084,7 @@ static void update_relative_gitdir(const char *name UNUSED,
 	trace_printf_key(&trace_setup_key,
 			 "setup: move $GIT_DIR to '%s'",
 			 path);
-	set_git_dir_1(repo, path, true);
+	set_git_dir_1(repo, path);
 	free(path);
 }
 
@@ -1109,7 +1097,7 @@ static void set_git_dir(struct repository *repo, const char *path, int make_real
 		path = realpath.buf;
 	}
 
-	set_git_dir_1(repo, path, false);
+	set_git_dir_1(repo, path);
 	if (!is_absolute_path(path))
 		chdir_notify_register(NULL, update_relative_gitdir, repo);
 
@@ -1145,7 +1133,7 @@ static const char *setup_explicit_git_dir(struct repository *repo,
 		die(_("not a git repository: '%s'"), gitdirenv);
 	}
 
-	if (check_repository_format_gently(repo, gitdirenv, repo_fmt, nongit_ok)) {
+	if (check_repository_format_gently(gitdirenv, repo_fmt, nongit_ok)) {
 		free(gitfile);
 		return NULL;
 	}
@@ -1222,7 +1210,7 @@ static const char *setup_discovered_git_dir(struct repository *repo,
 					    struct repository_format *repo_fmt,
 					    int *nongit_ok)
 {
-	if (check_repository_format_gently(repo, gitdir, repo_fmt, nongit_ok))
+	if (check_repository_format_gently(gitdir, repo_fmt, nongit_ok))
 		return NULL;
 
 	/* --work-tree is set without --git-dir; use discovered one */
@@ -1270,7 +1258,7 @@ static const char *setup_bare_git_dir(struct repository *repo,
 {
 	int root_len;
 
-	if (check_repository_format_gently(repo, ".", repo_fmt, nongit_ok))
+	if (check_repository_format_gently(".", repo_fmt, nongit_ok))
 		return NULL;
 
 	setenv(GIT_IMPLICIT_WORK_TREE_ENVIRONMENT, "0", 1);
@@ -1762,6 +1750,44 @@ enum discovery_result discover_git_directory_reason(struct strbuf *commondir,
 	return result;
 }
 
+int apply_repository_format(struct repository *repo,
+			    const struct repository_format *format,
+			    enum apply_repository_format_flags flags,
+			    struct strbuf *err)
+{
+	char *object_directory = NULL, *alternate_object_directories = NULL;
+
+	if (verify_repository_format(format, err) < 0)
+		return -1;
+
+	if (flags & APPLY_REPOSITORY_FORMAT_HONOR_ENV) {
+		object_directory = xstrdup_or_null(getenv(DB_ENVIRONMENT));
+		alternate_object_directories = xstrdup_or_null(getenv(ALTERNATE_DB_ENVIRONMENT));
+	}
+
+	repo_set_hash_algo(repo, format->hash_algo);
+	repo->objects = odb_new(repo, object_directory,
+				alternate_object_directories);
+	repo_set_compat_hash_algo(repo, format->compat_hash_algo);
+	repo_set_ref_storage_format(repo,
+				    format->ref_storage_format,
+				    format->ref_storage_payload);
+	repo->repository_format_worktree_config =
+		format->worktree_config;
+	repo->repository_format_submodule_path_cfg =
+		format->submodule_path_cfg;
+	repo->repository_format_relative_worktrees =
+		format->relative_worktrees;
+	repo->repository_format_partial_clone =
+		xstrdup_or_null(format->partial_clone);
+	repo->repository_format_precious_objects =
+		format->precious_objects;
+
+	free(alternate_object_directories);
+	free(object_directory);
+	return 0;
+}
+
 /*
  * Check the repository format version in the path found in repo_get_git_dir(repo),
  * and die if it is a version we don't understand. Generally one would
@@ -1770,26 +1796,21 @@ enum discovery_result discover_git_directory_reason(struct strbuf *commondir,
  *
  * If successful and fmt is not NULL, fill fmt with data.
  */
-static void check_repository_format(struct repository *repo, struct repository_format *fmt)
+static void check_and_apply_repository_format(struct repository *repo,
+					      struct repository_format *fmt,
+					      enum apply_repository_format_flags flags)
 {
 	struct repository_format repo_fmt = REPOSITORY_FORMAT_INIT;
+	struct strbuf err = STRBUF_INIT;
+
 	if (!fmt)
 		fmt = &repo_fmt;
-	check_repository_format_gently(repo, repo_get_git_dir(repo), fmt, NULL);
+
+	check_repository_format_gently(repo_get_git_dir(repo), fmt, NULL);
+	if (apply_repository_format(repo, fmt, flags, &err) < 0)
+		die("%s", err.buf);
 	startup_info->have_repository = 1;
-	repo_set_hash_algo(repo, fmt->hash_algo);
-	repo_set_compat_hash_algo(repo, fmt->compat_hash_algo);
-	repo_set_ref_storage_format(repo,
-				    fmt->ref_storage_format,
-				    fmt->ref_storage_payload);
-	repo->repository_format_worktree_config =
-		fmt->worktree_config;
-	repo->repository_format_submodule_path_cfg =
-		fmt->submodule_path_cfg;
-	repo->repository_format_relative_worktrees =
-		fmt->relative_worktrees;
-	repo->repository_format_partial_clone =
-		xstrdup_or_null(fmt->partial_clone);
+
 	clear_repository_format(&repo_fmt);
 }
 
@@ -1867,7 +1888,8 @@ const char *enter_repo(struct repository *repo, const char *path, unsigned flags
 
 	if (is_git_directory(".")) {
 		set_git_dir(repo, ".", 0);
-		check_repository_format(repo, NULL);
+		check_and_apply_repository_format(repo, NULL,
+						  APPLY_REPOSITORY_FORMAT_HONOR_ENV);
 		return path;
 	}
 
@@ -2023,27 +2045,18 @@ const char *setup_git_directory_gently(struct repository *repo, int *nongit_ok)
 			const char *gitdir = getenv(GIT_DIR_ENVIRONMENT);
 			if (!gitdir)
 				gitdir = DEFAULT_GIT_DIR_ENVIRONMENT;
-			setup_git_env(repo, gitdir);
+			setup_git_env_internal(repo, gitdir);
 		}
+
 		if (startup_info->have_repository) {
-			repo_set_hash_algo(repo, repo_fmt.hash_algo);
-			repo_set_compat_hash_algo(repo,
-						  repo_fmt.compat_hash_algo);
-			repo_set_ref_storage_format(repo,
-						    repo_fmt.ref_storage_format,
-						    repo_fmt.ref_storage_payload);
-			repo->repository_format_worktree_config =
-				repo_fmt.worktree_config;
-			repo->repository_format_relative_worktrees =
-				repo_fmt.relative_worktrees;
-			repo->repository_format_submodule_path_cfg =
-				repo_fmt.submodule_path_cfg;
-			/* take ownership of repo_fmt.partial_clone */
-			repo->repository_format_partial_clone =
-				repo_fmt.partial_clone;
-			repo_fmt.partial_clone = NULL;
-			repo->repository_format_precious_objects =
-				repo_fmt.precious_objects;
+			struct strbuf err = STRBUF_INIT;
+
+			if (apply_repository_format(repo, &repo_fmt,
+						    APPLY_REPOSITORY_FORMAT_HONOR_ENV, &err) < 0)
+				die("%s", err.buf);
+
+			clear_repository_format(&repo_fmt);
+			strbuf_release(&err);
 		}
 	}
 	/*
@@ -2833,7 +2846,8 @@ int init_db(struct repository *repo,
 	 * config file, so this will not fail.  What we are catching
 	 * is an attempt to reinitialize new repository with an old tool.
 	 */
-	check_repository_format(repo, &repo_fmt);
+	check_and_apply_repository_format(repo, &repo_fmt,
+					  APPLY_REPOSITORY_FORMAT_HONOR_ENV);
 
 	repository_format_configure(repo, &repo_fmt, hash, ref_storage_format);
 
diff --git a/setup.h b/setup.h
index 7878c9d267..705d1d6ff7 100644
--- a/setup.h
+++ b/setup.h
@@ -236,6 +236,26 @@ void clear_repository_format(struct repository_format *format);
 int verify_repository_format(const struct repository_format *format,
 			     struct strbuf *err);
 
+enum apply_repository_format_flags {
+	/*
+	 * Honor environment variables when applying the repository format to
+	 * the repository. For now, this only covers environment variables that
+	 * relate to the object database.
+	 */
+	APPLY_REPOSITORY_FORMAT_HONOR_ENV = (1 << 0),
+};
+
+/*
+ * Apply the given repository format to the repo. This initializes extensions
+ * and basic data structures required for normal operation. Returns 0 on
+ * success, a negative error code when the format is not valid as determined by
+ * `verify_repository_format()`.
+ */
+int apply_repository_format(struct repository *repo,
+			    const struct repository_format *format,
+			    enum apply_repository_format_flags flags,
+			    struct strbuf *err);
+
 const char *get_template_dir(const char *option_template);
 
 #define INIT_DB_QUIET      (1 << 0)
diff --git a/t/t0001-init.sh b/t/t0001-init.sh
index e4d32bb4d2..e89feca544 100755
--- a/t/t0001-init.sh
+++ b/t/t0001-init.sh
@@ -980,4 +980,14 @@ test_expect_success 're-init reads matching includeIf.onbranch' '
 	test_cmp expect err
 '
 
+test_expect_success 'init honors GIT_OBJECT_DIRECTORY' '
+	test_when_finished "rm -rf init-objdir custom-odb" &&
+	mkdir custom-odb &&
+	env GIT_OBJECT_DIRECTORY="$(pwd)/custom-odb" \
+		git init init-objdir &&
+	test_path_is_missing init-objdir/.git/objects/pack &&
+	test_path_is_dir custom-odb/pack &&
+	test_path_is_dir custom-odb/info
+'
+
 test_done