On my 14″ M1 MBP running MacOS Monterey, pressing the escape key suddenly stopped registering for exiting dialogs or entering the command mode in VIM. I opened the on-screen keyboard in System Preferences->Accessibility and pressed escape, and it does register the keystroke.

After trying a few things and reading around, it turned out that Siri was somehow to blame. I had also noticed lately that Siri had stopped working, it didn’t trigger by voice or clicking the dock icon. After disabling and re-enabling Siri in System Preferences, the escape key immediately started working properly.

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