The Shadow Physics Asset option in the Lighting section allows you to specify a Physics Asset, with shapes that will be used for shadowing when components have their Cast Character Capsule Direct Shadow or Cast Character Capsule Indirect Shadow option(s) enabled.
Only spheres and sphyl shapes in the Physics Asset are supported. Additionally, it's imporant to remember that capsule shadows can result in higher rendering costs when more shapes are used.
In-game, indirect capsule shadows are a good way to ground characters to the environment:
Direct capsule shadows can be used to achieve soft character shadows in an efficient baked lighting environment.
The light's Source Radius or Source Angle determines how soft the shadows will be. Capsule shadowing is very efficient because it computes shadowing at half-resolution with a depth-aware up-sample, using screen tile culling to limit the shadowing work (where it's needed).
The GPU cost is proportional to the number of capsules and the number of pixels affected by the casted shadow.