Umm Harpy’s fix sounds complicated, do what someone else suggested. I posted this in Guru when I finally figured it out.
Swim to the shore, stay underwater drop the sheath.
Go onto land and nudge close enough to pick up the sheath without going into the water, and viola you’re no longer progression blocked.
It’s actually very easy and it works 100%. I tried the suggestion of dropping it on the beech, climbing out of the water and picking it back up… this didnt work for me, as soon as i picked it up it glitched and disappeared. My answer works 100% because before completing the quest i restarted it to make sure it was possible to get the scabbard out of the water using the same method… it works and is very easy.