Using setting as a metaphor is just one of the many tools writers can use to create stories. When it's done well it can be successful, but it shouldn't be the only writing convention you use in your story.
The book I'm reading at the moment; The Sea on Our Skin by Madeleine Tobert is a perfect example of how setting can be used as a metaphor for characters.
The story begins with a wedding on a beach in a violent storm. This sets the tone for the book and establishes the characters. As the story progresses it become more obvious that the storm is a metaphor for the internal and external traits of the central characters that it foreshadows in the beginning.
Settings/place, seasons and the environment are often used in this way. That a character exists in a particular setting is no accident. The setting is often carefully crafted or chosen to reflect the internal world of the central character - whether to re-enforce likeness or difference (binary opposition).
Setting as binary opposition
Using setting as a binary opposition to a character provides the essential ingredient for a good story - conflict. Often to achieve this, one or more of the other characters is depicted in harmony with the environment, as is the case with The Sea on Our Skin.
The central male character Ioane Matete; a traveller, is in conflict with the island environment, while his new wife Amalia has a firm hold on the island traditions and community that she passes down to her sea-loving son; Angel.
Another example of setting used in this way is Vertigo (Amanda Lohrey) about a city-dwelling couple adjusting to a rural setting.
The challenge for writers is to find a unique environment and use it as a metaphor in a new way to add strength to characters. Although Tobert relies on a common event used in stories - a storm - she uses it in multiple ways to foreshadow, establish and impact characters, set the tone for the story and depict the central theme. Beyond that she uses many more elements of setting and other writing conventions to develop her story.
Here are some other important elements of writing to consider: