I came up with a patch that fixes the issue locally.
(It is the first patch, such that we can track the first patch down to maint)

While doing so, I noticed 2 issues:
* when having nested submodules, we probably want to have --submodule=diff
  to recurse into the nested submodules, so pass on the option.
  (2nd patch)
* the tests in t4060 hardcode hashes literally. I do not have a patch for that
  yet, but I will send patches later. (c.f. "sanitize_output" in t4202)
  
Thanks,
Stefan

Stefan Beller (2):
  diff: submodule inline diff to initialize env array.
  diff: recurse into nested submodules for inline diff

 submodule.c                                  |  4 +-
 t/t4060-diff-submodule-option-diff-format.sh | 70 ++++++++++++++++++++++++++++
 2 files changed, 73 insertions(+), 1 deletion(-)

-- 
2.12.2.576.g7be6e4ba40.dirty

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