I'd say it's a campaign style, not a setting, though it requires a setting with many opportunities for adventure. A sandbox game is the polar opposite of a railroad. In a sandbox the PCs can go wherever they want, at least within the GM's prepared area, and possibly beyond. There are lots of potential adventures to be had.
Examples of sandbox games: An old school mega-dungeon, Necromancer Games' Tomb of Abysthor and the computer games Fallout and Morrowind.
Detailed example:
The PCs start in the town of Goldenford. Here they can find rumours about bandits raiding the Coast Road to the east, the abandoned tower of the wizard Poktan to the north, stories about a secret cult worshipping Kali said to have a base beneath the town, the Caves of Blood where orcs, and worse, dwell in the mountains to the west and the Vale of Spiders to the south.
In addition the GM has several other adventure sites and plot hooks prepared, which aren't known to the townsfolk - the peculiar domed structure in the Dread Marsh, the faerie folk who kidnap children when the moon is full, the town merchant who is in league with the bandits, the secret cavern in the Red Mountains where Poktan still conducts his awful experiments. And so forth. The PCs may uncover these while exploring the wilderness or find clues that lead there. For instance if they deal with the bandits they may find a clue that uncovers the merchant or if they go to the tower of Poktan they may find a map of the Red Mountain cavern.
The important point is that all these areas have actually been detailed. Or if they haven't, the GM is quick enough on his feet to improvise. The PCs can go to any or all of them and have an adventure. (Except for the cult which doesn't really exist.)