I know that one...
It's the inductive pickup on the spark plug lead. It went to a capped (orange?) diagnostic plug somewhere under the hood, I forget where. Back in the day, BMW had a electronic diagnostic machine that would read various parameters (on a running engine, I suppose).
Surprising that it's still there. I suppose you have the original plug wires, or an exact replacement set.
You can, with some caution, remove the diagnostic wiring and the plug, since the diagnostic machines have probably all gone to the recycler long ago. One must be careful because at least on the 2002 I had, removing the wiring also disabled the ignition. Once this is realized, it can be done, and cleans up the underhood area somewhat.
IIRC if one knows the diagnostic routing, there is a use for it, possibly as a remote starter, my memory is a little fuzzy about this.
Alternatively the purist cleans and reorganizes the wires, burns some incense, sacrifices a small animal, and so on.