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The second-generation functions in Firebase are cloud functions that allow developers to run backend code in response to events triggered by Firebase features such as database changes, authentication status changes, and analytics events. These functions can be used to automate tasks such as sending emails or updating user profiles.

Environmental variables can be integrated using the .env file by defining key-value pairs in the file that represent the environment variables needed by the Firebase functions. These variables can then be accessed in the code using the process.env object. The .env file should not be version controlled as it contains sensitive information such as API keys and other credentials. Instead, it should be added to the .gitignore file to prevent it from being uploaded to the repository.