When it comes to handling sensitive information like private keys in Netlify projects, there are three ways to set environment variables: via the project dashboard, team settings, or the `netlify.toml` configuration file. This allows for secure and accessible management of sensitive data, such as private keys, without compromising code security. By storing environment variables on the project dashboard, teams can access and edit them, while also keeping sensitive information out of code repositories. Additionally, Netlify's auto-served environment variables in `ntl dev` mode enable local coding with the correct environment variables, making it easier to work on projects. The use of environment variables provides benefits such as reduced errors due to forgotten `.env` files and more secure collaboration, allowing teams to access project settings without exposing sensitive information.