Level Instance desaturation effect does not respect occlusion when the selected object is occluded by a Nanite mesh

When selecting an asset in a level instance that is being edited via LevelInstance/Edit, the silhouette of the object is visible through occluding nanite meshes.

This has the effect of disabling the desaturation effect entirely when the level instance is large, such as the selected tile of the landscape in the first image.

Open a new OpenWorld level, disable streaming, and save this in a project.
Open any other level containing Nanite geometry and add the recently saved level as a LevelInstance.
Edit the LevelInstance and select a terrain tile behind the Nanite geometry. Doing so will cause the silhouette of the selected object to remove the desaturation effect.

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