That error message indicates a hardware issue of some sort with the laptop which is affecting the Touchbar. While I have seen a couple people post here on these forums that reinstalling macOS solved the problem, but I've never seen that help with any of the laptops I support in our organization. Every single time I have seen this error with one of our organization's laptops....it has always been a hardware issue.
This "required software update" is actually referring to the EmbeddedOS that needs to be uploaded to the Touchbar so the Touchbar can function. macOS refuses to boot normally if this cannot be achieved and in fact macOS actually deletes the local hidden copy of EmbeddedOS from the internal SSD so that is why it is trying to download a new copy. Until the hardware issue has been resolved, there is no way to boot this laptop normally.
In the mean time you can boot into Safe Mode to continue using the laptop in a degraded & more limited mode until it can be repaired and to allow you to make a good backup before having the laptop serviced.
Unfortunately I cannot say exactly which part is defective. It may be the Touchbar itself which is part of the Top Case Assembly, or it may be the Logic Board, or it may be the Display Assembly (I have seen the built-in camera fail which somehow interferes with the Touchbar being able to upload the EmbeddedOS image). This is what I have personally experienced while supporting thousands of our organization's Apple laptops.
