After lodging a support request, I got the response below from Microsoft one and a half weeks later:
Thank you for contacting OneDrive support. We hope you are doing well!
We understand that you have been waiting patiently for a response from us, and we appreciate your patience. We regret to inform you that we are currently experiencing high volume due to unavoidable circumstances.
We understand the importance of being able to access shared folders directly through File explorer. We share your frustration regarding the challenges you have faced due to this problem.
We have reported the same issue to our engineering team, and they are aware of this issue wherein shared folders when added to ‘My Files’ becomes an .url internet shortcut. Though, we cannot promise an ETA (expected Time of Arrival) for a fix at this time, but the engineering is working to get the fix rolled out as quickly as possible.
The .url internet shortcuts will automatically convert back to a folder when the issue is resolved. You can verify the same information on our official website as well. Here is the link: Add and sync shared folders to OneDrive for home - Microsoft Support
In the interim, we suggest you to please use OneDrive web account (https://onedrive.live.com) > Shared tab > Shared with me to work on shared files and folders. This should allow you to bypass the issue until a permanent fix is implemented.
We understand that this is not an ideal solution and appreciate your understanding and cooperation. Rest assured; our team is committed to delivering a permanent fix as swiftly as possible.
We apologize for any inconvenience this may cause and appreciate your understanding and patience during this time.
Should you have any further questions or require additional assistance, please feel free to generate a new ticket via this link: https://onedrive.live.com/?action=feedback
Warm wishes! Stay safe and take care.
Thank you,
Shahin A.
OneDrive Team