diff --git a/compose/env-file.md b/compose/env-file.md
index d5ee6623df..2cf75c4c09 100644
--- a/compose/env-file.md
+++ b/compose/env-file.md
@@ -5,8 +5,10 @@ title: Declare default environment variables in file
 ---
 
 Compose supports declaring default environment variables in an environment file
-named `.env` placed in the folder where the `docker-compose` command is executed
-*(current working directory)*.
+named `.env` placed in the project directory. The project directory is specified by order of precedence:
+- `--project-dir` flag
+- Folder of the first `--file` flag
+- Current directory
 
 ## Syntax rules