Can't get .conf.template files to work with env variables/file

I'm having an issue getting .conf.template files to generate a .conf file within the /etc/nginx/conf.d directory.

I have the following docker-compose.yml file:

# docker-compose.yml

version: '3.8'

services:
  nginx-proxy:
    image: nginxproxy/nginx-proxy:1.5
    container_name: nginx-proxy
    restart: unless-stopped
    ports:
      - "80:80"
      - "443:443"
    environment:
      - TRUST_DOWNSTREAM_PROXY=false
      - KEEPALIVE_REQUESTS=${KEEPALIVE_REQUESTS}
    volumes:
      - /var/run/docker.sock:/tmp/docker.sock:ro
      - ./certs:/etc/nginx/certs
      - ./config/custom.conf.template:/etc/nginx/templates/custom.conf.template
    networks:
      - nginx-proxy-network

networks:
  nginx-proxy-network:
    name: nginx-proxy-network

Within the mounted config folder I have the following custom.conf.template file and .env file

# custom.conf.template
keepalive_requests ${KEEPALIVE_REQUESTS};

# .env
KEEPALIVE_REQUESTS=9999

When I start the proxy container using docker compose up and navigate to the /etc/nginx/templates folder to see if everything got mounted correctly I get the following output:

➜  docker git:(develop) ✗ docker exec -it nginx-proxy bash
root@d9d62440ba84:/app# cd /etc/nginx/templates
root@d9d62440ba84:/etc/nginx/templates# ls
custom.conf.template
root@d9d62440ba84:/etc/nginx/templates# cat custom.conf.template 
keepalive_requests ${KEEPALIVE_REQUESTS};

The issue

However when after that I navigate to the /etc/nginx/conf.d folder, I just see the default.conf file. I expected to see custom.conf aswell.

root@d9d62440ba84:/etc/nginx/templates# cd /etc/nginx/conf.d
root@d9d62440ba84:/etc/nginx/conf.d# ls
default.conf

Using the base nginx container does work

I also tried this exact same setup using a base nginx:1.25.4 image, and everything worked just fine.
It seems as if the parent nginx image entrypoints (mainly https://github.com/nginxinc/docker-nginx/blob/master/stable/debian/20-envsubst-on-templates.sh) arent triggered correctly/overridden by something the proxy does?

Thanks! 🙏🏻