Sony hasn't advertised this setting much and they haven't explained it at all.
It's interesting that they would even bother with this setting. Any games with dynamic resolution would be maxed out on PS5 already. So you would have to assume this will force upscale 1080p games to 4K, but even then, why bother? Most of the best selling PS4 games have already been patched for PS5 or re-released on PS5 and I think most would agree the bigger problem on PS4 is the framerates.
I think what is more likely and maybe more promising is that this is just an example of Sony building their forever platform better than they did with the PS5. Microsoft's BC worked a lot better with games getting uncapped framerates to 120 fps for example.
I'm guessing they are really advertising this because it's a bit of a nothing burger in terms of delivery and obviously YMMV, not to mention their focus isn't on PS4. But if this is a sign of things to come for PS6, I think it is a welcome one.