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Tight-binding models derived from density functional theory potentially provide a systematic approach to the development of accurate and transferable models of multicomponent systems. We introduce a systematic methodology for environmental tight binding in which both the overlap and environmental contributions to the electronic structure are included. The parameters of the model are determined directly from ab initio considerations, thus providing a formal conceptual link to density functional approaches. In order to test the validity of the approach, the model is applied to small clusters of Ni and Co, whose electronic structure is largely determined by the interplay of tightly bound d-valent states and the disperse s-states. We numerically illustrate that it is essential to include environmental contributions in the tight-binding approach in order to reliably reproduce the electronic structure of such clusters.