This functional limitation was eliminated from consideration long ago: it’s very common to want that functionality. There were options considered for still denoting nesting, e.g. start all nested chunks with @nest, but this was decided to be inconveniently verbose. I think & is safe from being inconveniently verbose, but you can’t sanely use that without the functional limitation.

On your example: nesting is not about the sort of encapsulation you think it is—that’s incidental at best. It’s perfectly reasonable to say “this chunk of styles is about <em> elements; and when they’re inside <li>, do this”. The specific example you’ve given is also unrealistic with all three rules touching the same property in this way and two mutually exclusive (that is, li and em cannot both match, in any DOM), and I wouldn’t want it written with nesting at all, but rather like this, for much-increased clarity:

  li {
      color: blue;
  }
  em {
      color: green;
  }
  li em {
      color: red;
  }