If a portrait is a picture that tells us something about a person/people, then an environmental portrait is a picture that uses location and setting to help tell us something about a person/people.

The challenge here is to create an image that uses the environment as an element in the picture, either informing us about the person, providing context, providing graphic, or all of the above. The relationship of the subject and the environment is usually important in the picture, although the relationship is not always literal.

Some thoughts: 
Location shooting does not mean that you have to take the location as is. Moving the furniture around, setting up elements, or lighting the place are all valid, maybe even encouraged, strategies.

That does not mean that you HAVE to change anything, either.

Consider the balance of subject and environment. Losing the subject or losing the environment is bad, but there is no hard and fast rule about the size of each.

Some examples:
Much editorial portraiture falls into the category of environmental work. Take, for example, this portrait of a Chainsaw Carver and his chess set: http://www.pdnphotooftheday.com/2009/06/1534

Alan Thornton, at http://www.amtproductions.com/, has some great examples (no direct link to the pictures in his flash site). Some of you will remember him from coming to talk to the club two seasons back.

And here's some stuff from Joe McNally, whose site and blog are full of great examples of location and environmental portraits. How about a portrait that says, "I'm marrying a fighter pilot": http://www.joemcnally.com/blog/wp-content/uploads/2009/07/_klm3014-pres-...

Or a portrait of a dive master with over 27,000 dives to his credit:
http://www.joemcnally.com/blog/2009/07/13/island-light/

Or some examples where the environment is a key element of the picture, but, well, does not necessarily come from the subject conceptually. It still qualifies.
http://www.joemcnally.com/blog/2009/06/29/joe-mcnally-workshop-day-4/

Greg Heisler has some great examples on his site: http://www.gregoryheisler.com/ under "contextual."