Shadows do not work in Act 1, once in Act 2 I enabled shadows on very high detail and they worked perfectly. Went back to Act 1 and the blending issue showed up again. Once back in Act 2, shadows worked.
WARNING: Shutdown problems
It appears the game doesn't always shut down properly. For the all versions, this will waste RAM (and possibly CPU time). For the Steam version, this will also prevent cloud syncs, and you will not be able to re-launch Torchlight 2 until the old process is gone.
Use killall Torchlight2.exe2 to force-kill it. In my experience, this has no negative effects (if you do it after trying to shut down the game properly first).