Your environment is a character too!
I read a lot online about how storytelling and character development in games can use improvement, and how dynamic choices and the ability to fail and replay sections of a game multiple times make telling a good story very difficult without the fallback of "get to point A, watch a cutscene. Cool. Now get to point B and you'll see another cutscene". It segments the story and the gameplay, and the story only serves to give purpose to the gameplay. Is this really a problem? Many who are looking for character development would say no. You can't watch your character die and respawn 1000 times then try to feel an emotional bond when he dies for good in some cutscene.
I think people forget sometimes that the environment and setting of a game can be as much of a character as any in game bulky hard-to-the-core space warrior. I'm currently working on a game where this is the key to the storytelling aspect. The characters in the game, while they do have backstories, are mostly disposable and not very memorable. This is a conscious decision on my part, because the real character in the game is the universe it takes place in. The player may even notice that the world is what hides clues to the character's backstories, not the characters or cutscenes or story text. In essence, the characters are born out of that world, rather than the world simply being some hub for some adventure. The world has a story to tell, the characters are just there to walk you through it.
Level design is vital to making a world feel alive. Too many games nowadays sacrifice good level design for aesthetics. The key is building a solid level first, then working in aesthetics later. Why make a knee-high fence a boundary? Why, suddenly, is all this rubble in the middle of the ground on fire? Because it looks cool? Every piece of a level should have a gameplay purpose to it, even if that purpose is minor or subtle ("the character could hide behind it if he wants", "it catches the eye and encourages the character to approach it"). Any other visually pleasing artifacts that can't be worked into the gameplay could easily be placed in the background where the player will never reach them.
I've already had to trash a level in my game because I designed it to resemble a big water pipe and added all these cool effects to it only to realize that it confuses people. The level has a really really simple solution to it, but people are so preoccupied with all the red herrings in the level and effects that they miss jumps, try a more complicated solution, die without knowing why, or even give up. It felt bad to trash the level because it was so cool looking though, but I can't seem to find a way to fix it without getting rid of what makes it look cool.
Anyway here's some examples of games where the world is a character, and which do it right and which seem to miss the point:
GREAT examples of the "world as a character":
Super Metroid / Metroid Prime: It's fairly obvious why here, since the entire point of the Metroid series rests on its level design and the large interconnected world to explore, full of secrets and surprises and back history to uncover. Metroid Prime adds in the scanner, which adds a lot of subtle backstory to the planet you're exploring, and its done in such a good way that you almost forget who you're playing as and concentrate solely on the rich world you are in.
Portal: While GLaDOS and the Weighted Companion Cube sure have a lot of character in them, the strange test facility you're in also has a lot of backstory to it. The writing on the walls once you "break out" of facility and venture into its hidden core is a great mood setter and tells a side story that is easily overlooked if you're to busy concentrating on the main story. I love subtly like this.
Bioshock: I don't need to say much here, since 90% of the game is about the backstory of Rapture, and they do a good job telling it.
GOOD examples of the "world as a character":
Halo: I don't think Bungie realized the potential of the ring in halo. It's an interesting concept and I love how its presented in the game (where peering into the distance you can see the whole ring from any point on the ring, it's a really great touch), and you can't help but wonder what its purpose is as you explore it. Of course, they outright tell you at the end of the game, and focus a lot on Master Chief, who isn't much of a character to begin with.
Metroid Prime 3: It still does a good job doing what the first Metroid Prime did, but they muddle it up a little bit with a cheesy story and split the world up to multiple planets which really downplays any sort of history or consistency that could have been built into the world.
BAD examples of the "world as a character" (note: not implying that the game is bad):
Shadow Complex: I just bought this recently and haven't beaten it yet, so my opinion is still subject to change. For a game that borrowed so much from Metroid, I can't understand why they decided to remove most of the personality from the complex. There was one part so far where the world felt interesting (the flooded part) but other than that it feels bland and grayed out, like many modern games today. I can't help but wonder how much better the world would have felt if they flattened the Z-axis a bit, since there's no reason I should need to jump from point A to point B when there's a staircase 2 feet over, but in the distance. The art seems to get in the way of playing through the levels a lot, and they focus a lot on trying to develop the character of the guy and his girlfriend, and the people running the organization, yet they completely ignore the personality that the base could have had.
Most other games released this generation: They just don't try at all to make the world memorable, instead opting to try and characterize some bulky space guy or some bulky WWII soldier or some bulky criminal or some busty fighter.
I think there's a lot of untapped potential in trying to make the environment and level design as much of a character, if not more of one, than the cookie-cutter characters you normally see in games. People trying to find a way of telling a story in a way that can only truly be told through this medium, take this into consideration.