Also, how does this even work on a digital camera? Surely we can't actually adjust how sensitive the sensor is to light, so is it just a simulation?
Remember that "digital" sensors are mostly analog devices (dealing in continuous voltages).
It’s signal gain of the sensor.
“In digital camera systems, an arbitrary relationship between exposure and sensor data values can be achieved by setting the signal gain of the sensor. (…) For digital photo cameras ("digital still cameras"), an exposure index (EI) rating—commonly called ISO setting—is specified by the manufacturer such that the sRGB image files produced by the camera will have a lightness similar to what would be obtained with film of the same EI rating at the same exposure.”
Source: https://en.m.wikipedia.org/wiki/Film_speed#Digital_camera_IS...
Or think of it like changing the gain on an microphone pre-amp before going into a Analog-to-Digital convertor.