This issue only affects the alpine template when using an alpine user name:

shell start --set '.user.name="alpine"' template://alpine 

It does not affect the alpine-iso template.

The /etc/environment is loaded in ssh session after a reboot of the instance.

This also explains why this doesn't happen for any other user name except for alpine: in that case the 00-alpine-user-group.sh boot script will delete the alpine user created by cloud-init and reboot the instance.

Restarting the sshd service does not make a difference; it requires a reboot to fix itself.

Note: /etc/environment is loaded via PAM, but I couldn't find anything to force a reload.