Cannot set environment variables with env:

[skirmess]

The following workflow

name: test
on: push
jobs:
  wsl1:
    name: WSL1
    runs-on: windows-latest

    strategy:
      fail-fast: false
      matrix:
        include:
          - distribution: 'Ubuntu-20.04'

    defaults:
      run:
        shell: wsl-bash {0}

    steps:
      - uses: Vampire/setup-wsl@v1
        with:
          distribution: ${{ matrix.distribution }}

      - run: echo $TEST_ENV
        env:
          TEST_ENV: 17

produces the following error

Run echo $TEST_ENV
  echo $TEST_ENV
  shell: D:\a\_temp\wsl-shell-wrapper\wsl-bash.BAT {0}
  env:
    TEST_ENV: 17
/mnt/d/a/_temp/08e7af50-f443-48aa-8385-def712c2f327: line 1: TEST_ENV: unbound variable
Error: Process completed with exit code 1.

[Vampire]

This is normal WSL behavior.
Almost no environment variables are forwarded from Windows to WSL by default.
You need to use WSLENV to configure which environment variables are forwarded and how they should be converted (path, list of paths, plain, ...).
In your example if you add WSLENV: TEST_ENV as environment variable, it runs through as expected.

[skirmess]

That worked perfectly, thanks.

In case someone else finds this. The variable takes a colon separated list of environment variables to allow. Like so:

  wsl1:
    runs-on: windows-latest

    env:
      TAR_OPTIONS: --warning=no-unknown-keyword
      WSLENV: AUTOMATED_TESTING:PERL_USE_UNSAFE_INC:TAR_OPTIONS

    defaults:
      run:
        shell: wsl-bash {0}

    steps:
      - uses: actions/checkout@v2
        with:
          path: ${{ github.event.repository.name }}

      - uses: Vampire/setup-wsl@v1
        with:
          distribution: ${{ matrix.distribution }}
          additional-packages: ${{ matrix.packages }}

      - name: perl Makefile.PL
        run: perl Makefile.PL
        working-directory: ${{ github.event.repository.name }}
        env:
          AUTOMATED_TESTING: 1
          PERL_USE_UNSAFE_INC: 0

[Vampire]

Here you have a full description of the possibilities and flags: https://devblogs.microsoft.com/commandline/share-environment-vars-between-wsl-and-windows/