There are some different units with different abilities. "Death" magic faction has different builidings (though buildings essentially do the same thing). Kindom tends to be more friendly with kingdom and empire to empire but less so with the others diplomatically. Kingdom uses horses, empire wargs (though I haven't checked the stats on wargs to see if there is any functional differences other than just an image). Spell wise I don't know. There is some small tech chart differences. I don't think there is as much variation in the factions as there could be, at least I'm not seeing it in the game, but I do see some variation between empire & kingdom factions. Some factions have some recruitable monsters that others don't, and they do occasionally use them .. though usually later in the game.

um... expanding a bit more

when you create faction/sov, you can pick a race.... which just happens to be one of the stock made factions.

oddly enough, when you make a faction, your faction appears in the folder /my doc/my games/elemental/races/ with a filename of faction_blah.xml

i assume the spellbook (life/death), research are purely determined by the allegiance to kingdom/empire... so basically nothing to do with race per se.

there are differences in models, though no idea how many types are around... are there other differences?

should race not be a bit more of a factor? eg.. multiple factions per race with race actually doing something.. eg.. some races are stronger, others faster, etc

They can be, as race defines the default look and stats for your units; however the default races have the same stats.

come to think of it. heroes don't show their race, do they? (apart from the looks)