setup-disk should take into account logical_block_size not physical_block_size
Currently in setup-disk the physical_block_size (512 or 4096 bytes) of a drive's sector is used to decide what size a ESP partition should be created as.
Drives can either be 512/512, 512/4096 or 4096/4096 (logical/physical respectively). When a FAT filesystem is created only the logical sector size is taken into account and so the above code in setup-disk should use logical_block_size.