Here's the thing a lot of people outright dismissing OP's concerns don't understand: the idea that how your avatar is perceived by others does affect you in game and outside the game has been a topic of Game Studies programs since as early as 1995. This isn't anything new, and OP isn't a "sensitive snowflake" for being concerned.
Like it or not, MMORPGs are not just games: they're social spaces. And believe it or not multiple research studies have proven time and again that we as social beings do bring our behaviors from our offline lives into gaming spaces and communities (without even meaning to). That includes judging people by how they type in game, to how they designed their avatar (and therefore look in game), right down to the very content they take part in within the game itself (and outside of the game).
Even without looking up the papers you can see evidence of that both on here and on Reddit: from people "jokingly" making assumptions about people who play Lalafells to people proclaiming Miqo'te players are all horny guys, to whether or not only certain people engage in RP (it happened in this very thread!).
We judge people by what we see and what they choose to present. Even if you're the type of person that doesn't "judge a book by its cover," you do it unconsciously (within milliseconds even!). And we get angry/upset when people don't perceive us in the way we were hoping they would.
Considering that our avatars are the only way to get that sense of physical first impressions in an MMO, it is absolutely not a stretch to assume that an avatar's appearance can affect the first impressions of a person between players. And therefore completely direct how we interact with each other from that first impression onward.
In this paper from 2008 we get this little nugget: (EDIT for some reason hyperlinking didn't work: https://cyberpsychology.eu/article/view/4211 )
Essentially: it really isn't weird to care about your character or care about what others think of your character. Quite a few people do it, even unconsciously. As a matter of fact it's healthy, despite what some of the more volatile posts in this thread want to claim."Some authors (e.g. Allison et al., 2006 and Turkle, 1995) compare the player and avatar's relationship to a transmission field, as roughly defined by psychoanalysis: the avatar is not in exclusive competence of the player, while not being completely separated from them. It lies somewhere near the boarder of external and internal (psychological) reality. From the player's viewpoint, the avatar is a kind of individual overlap owing to which they may experiment with their identities. Wolfendale (2006) then describes directly the player and avatar's relationship as an attachment, i.e. as if with an absent or idealised or unreal person, while the feelings created around this relationship are real.
"Some psychodynamic schools point out the focal role of so-called images in one’s psyche (e.g. Hillman, 1997, Kast, 1992), which are certain complexes around which fantasies and emotions resolve and which can be experienced as certain independent parts of one’s psyche. The in-game character can be, in a certain sense, considered an “image” and can thus be an important aspect of a player’s life or psychical development. Understanding what the relationship between a player and his in-game character mean for the player can, to a certain extent, lead to an explanatory framework for e.g. excessive game-play."
And while I couldn't find a free copy of the paper that this study references, it is cited if anyone was interested enough to go get a copy:
We all do this, but with varying goals and levels of attachment.“The kinds of avatars people are able to create and use (hence, the avatars and looks the game designers provide for players to use) is important for our understanding of embodiment in virtual worlds. Avatars are in large part the central artifacts through with people build not only social lives, but identities. They become access points in constructing affiliations, socializing, communicating, and working through various selves. They are the material out of which people embody and make themselves real.” (pag. 3)"
Anyway, the point is: given how we do form first impressions based on how our avatars are presented to each other it isn't a stretch to assume that using a graphical mod like the nude mod to change another player's appearance would affect first impressions. Whether or not those first impressions would lead to treating those players well or not depends entirely on the people involved.
So saying that these mods don't affect the people that can't see them isn't really correct. It does, because it affects your first impressions (and your interactions afterward) of other players whether you consciously acknowledge it or not.
Now does that mean that using the nude mod is bad? No, it doesn't. No one should feel bad or gross for making use of it or for defending it. But assuming that OP is being overly sensitive is wrong, and that's backed by years of research by multiple people within Games Studies (and yes, that's a thing).