gistfile1.lua

local script = function()
    wait(5)
end

local scriptFuncs = {
    wait = function(secs)
        print (entity, 'is waiting', secs)
        assert(entity ~= nil) -- FAILS HERE
    end,
}

function execWithContext(entity)
    local env = {entity=entity}
    for key, func in pairs(scriptFuncs) do env[key] = func end
    setmetatable(env, {__index = _G})

    setfenv(script, env)
    script()
end

local myEntity = "ENTITY1"

execWithContext(myEntity)