A technical explanation from my understanding of the technology.
The rain sensor uses an infrared diode and a sensor to detect reflection from water droplets on the windshield, thus the amount of water on the windshield. Once a threshold is reached, the wiper is activated for a single wipe.
For the technology to work, the sensor must reside below a wiped area of the windshield. For most cars with tandem wipe pattern for both wipers, it is incorporated nicely into the rear view mirror mount on the windshield in a tidy package. As the passenger wiper will always clean the sensor area.
However, in the smart, it has a very large windshield (for its size), served by an opposed wipe pattern, the mirror mount area, being how high up it is, is never wiped. Thus, the sensor must move somewhere where it is wiped, thus the ugly extension you see here.
There are other options, such as the top left/right edge of the window, it can be shorter, but will always remain visible to the driver. So at least the current setup is partially covered by the mirror on the inside. The same argument would be true to move the sensor to the bottom of the windshield.
So smart did the best they can, pick the best possible spot given the wiper setup.
Not what you want to hear, but this is what we are dealing with.