What does the Digital Threat scope actually do?

The Digital Threat highlights the enemy's character model red which in regular circumstances is not exactly groundbreaking as Apex character models are designed to stand out and be visible when compared to that of PUBG (not to mention Escape from Tarkov).

The important thing is that the scope's highlighting effect works through Bangalore and Caustic smoke, being especially useful in Bangalore smoke, as people tend to stay IN it, rather than getting away from it. Shooting at players hidden in or being hidden in smoke yourself can be game changing if you have digital threat scope.

The threat highlighting feature applies a red outline and shading to enemy players that are visible through your scope while you're aiming down sights. It doesn't apply to enemies that you see outside of the scope's window. Enemies are still highlighted when they're occluded by smoke or minor debris. It doesn't work for enemies that are too far away (I'm not sure exactly, maybe beyond 100m).