"Character setting" is a relatively new term meant to indicate where a character sits in the setting of the world. I have only seen it used at university, to be honest. So, where does the character sit on the spectrum of neurodiversity? Where do they sit politically? With regards to gender fluidity? With regards to their spirituality and religious beliefs? Their food choices? What do they think about issues as opposed to what do they say about issues? More than that, you need to be able to give a reason "why" they feel this way.
It's where a character fits into the society you have created for them, in relation to others in that society, and in relation to the power structure of the society. It is pointed out that no person exists in a vacuum, and so this must also be reflected.
To be honest, I think it's wank, but it's what the universities are currently teaching to the capital-L Literature students, as something required to create a more well-rounded character, above and beyond the normal character building.
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