You are correct. The PaperMod theme provides its own figure shortcode, and it has the same shortcomings as its image render hook. Please log another issue with the PaperMod theme, but note that this theme hasn’t been maintained very well over the past few months.
You can fix this by creating your own figure shortcode that overrides the theme’s shortcode:
mkdir -p layouts/shortcodes
touch layouts/shortcodes/figure.html
Then copy the source for Hugo’s embedded figure shortcode into the file you just created.
The documentation for using the shortcode is here:
https://gohugo.io/content-management/shortcodes/#figure