Objectives: This research investigates the association of malnutrition with social and economic factors in general and environmental factors in specific such as sanitation facilities and drinking water sources for Pakistan. Methods: Authors used the latest data of 1010 Under-Three children from Pakistan Demographic and Health Survey (PDHS) 2017–2018. Cumulative Index of Anthropometric Failure (CIAF) was developed to measure the malnutrition status among children based on z-scores of WHZ, WAZ, and HAZ, respectively. The study has applied the discrete-choice logistic methodology to find the relationship of malnutrition with socio-economic characteristics. The interaction terms of drinking water source and sanitation facility have been measured to see the impact of environmental factors on child malnutrition. Results: The study results depict that the likelihood of malnutrition increases when the child had diarrhea recently and the child belongs to the deprived region such as KPK, Sind, and Baluchistan. However, the chances of child malnutrition drop with (1) an escalation of mothers’ education, (2) a rise in wealth status of the household, and (3) the improved water source and sanitation facility in the household. The only water-improved sanitation category of the interaction term is significant in the model which depicts that households having both improved water and improved sanitation facilities had very fewer chances of malnutrition among their children. Conclusion: Authors conclude that malnutrition in younger children is associated with improved water as well as sanitation facilities, maternal education, and household wealth in Pakistan.