How to fix "A software update is required to use this startup disk" error?

Hi! I have my old Macbook hard drive in an external enclosure. The drive still works great, connects to my new computer and I can access it fine.

For various reasons, I want to boot from this hard drive. However, when I select it in the Startup Disk options (after pressing option while restarting), I first get a warning "A software update is required to use this startup disk" with an option to press "Update" which I do. However, I then get another message, "Startup disk is not supported." and I'm unable to progress. I've booted from this drive before, but, notably, NOT before I updated to Monterey. Is there something about the new OS that prevents me from booting from my old computer's drive?

Let me know what other information might assist in diagnosing!