Py_Initialize() is not supposed to set it up. If you are embedding Python, you have to be responsible for configuring the paths that it uses - pyvenv.cfg is configuration for Python interactive, not the shared lib (using Windows terminology, it's configuration for python.exe but not python36.dll).

Personally, I am 100% against letting an embedded runtime automatically pick up any settings from the environment. You don't know where they came from. That said, I'm also in favor of making it easy for embedders to imitate the interactive shell's configuration.

Victor (nosied) and others are in the long process of updating embedded interpreter configuration to be easier to use, so adding him here as feedback, but I don't believe there is going to be a specific fix for this. Consider calling Py_SetPath before Py_Initialize to configure the search paths you want to use.