This rating has to do with how pleasing the room is to be in. Sims like rooms with four walls, a door or two, and a bunch of windows. They like pretty decorations on the walls, and hate trash or garbage lying around.

As you move from room to room, you'll see the environment rating change accordingly. If your room has a low rating, add a few decorations, make sure there are enough windows and that you have wallpaper and carpet up. Note that your sims don't have *taste* - they don't mind if the wallpaper is really ugly :)

The Sims 2 Tips, Techniques and Walkthroughs