frogthroat: Are you trying to adjust the difficulty when you are in the main menu, or when you have the game loaded and you press ESC?
When no save game is loaded, the difficulty setting is not visible. The difficulty is save game specific, so there is no global setting for it.
In case you were already in a saved game and the setting is still not there, I tried to check if you can change it manually in the save game. Alas, the actual save game is, as expected, not readable in Notepad, but there was metadata.json file as well. Unfortunately changing the difficulty in the metadata.json does not change the actual game difficulty level. (I tried by changing
"difficulty": "Hard", to
"difficulty": "Story", but since it's some metadata, it didn't change the difficulty in the game.
But from your screenshot it looks like you are in the main menu with no game loaded. There is no transparency on the background, which would indicate that you would have a game loaded. Try to load a game, press ESC and then change the difficulty.
If I just in the main screen go to settings, there is no game difficulty option. However, if I load the saved a game and then hit the [ESC] key and go to the game settings; the game difficulty option is there. That worked, thank you for your help.