Diagnostics and environment provides the information which is collected and surfaced up to LCS to provide a one-stop overview for a D365 environment it also provides data which is collected through various performance counters listed on this screen. Event tracking window is also available for both diagnostics and monitoring so you can keep track the events.
Environment Monitoring allows you to monitor the operational health of your environments. These contain rolled up views, so you can analyze performance by component, environment, Project, and organization. For example, we can see the resource usage for each AOS as well as SQL Server activity. Notifications can be used as a way to help catch issues early when a threshold violation is caught. These notifications can be set up in LCS.
Accessing the Monitoring and diagnostics portal:
The System Diagnostic Dashboard can be accessed using the tile in your LCS dashboard. This dashboard provides an overview of errors flagged, such as jobs that did not finish properly also provides a high-level overview of what is going on within the selected environment. Diagnostics also features configuration issues, and issues related specifically to environment set up.
Open LCS, and navigate to the appropriate project. In the Environments section, select the environment to view, and then click Full details. On the Environment details page, click Environment monitoring to open the Monitoring and diagnostics portal. Or you can open through main menu and click system diagnostic option.
For detail understanding you can refer Microsoft Documentation for Monitoring and diagnostics tools.