https://arstechnica.com/gaming/2021/11/the-legal-issues-getting-in-the-way-of-legal-emulation/

The TL;DR is that there are games Microsoft simply cannot bring to their back compat program due to licensing issues. Hardware based back compat gets around this, since you already have the physical disc and no new code is needed.

"Generally speaking when you have a development or publishing contract, it’s going to say what publishing rights you are licensing out/in," Michigan attorney and Virtual Legality host Richard Hoeg told Ars. Those contracts usually explicitly state which specific platforms the game can be published on, meaning "running on 'virtual 360' software on an Xbox One, for instance, isn’t necessarily going to be permitted," Hoeg said.

For any game with such a contract, Microsoft would have to negotiate a fresh license from the publisher to emulate it on a new platform. This is also why Nintendo couldn't just cite its original publishing contracts to throw every NES game onto the Wii Virtual Console, for instance; subsequent platforms weren't covered in the original deal. Even disc-based Xbox 360 games would need a new license to cover the new emulated versions running on the Xbox One (which involve downloading a new version of the game in an emulation wrapper).

Because Microsoft's backward compatibility requires writing new code for each game, some are left out in the dust. Unfortunately it seems that for modern consoles that do not have hardware backward compatibility, video game preservation will require general purpose emulation and piracy in the future. Take care of your systems!