I think that is there to protect drag queens, who have been subjected to a lot of abuse and accusations of paedophilia, but I am not certain. Some fetishists are cross dressers, but not all cross dressers are fetishists.
In an email to Scottish Government officials in February 2020, prior to the Bill’s introduction, the director of the Equality Network, Tim Hopkins, states:
‘the last thing we want to see is a bill introduced that reduces the protections of the current law, taking away protections from cross-dressers that they have had for 10 years under the 2009 Act.’
He explains the rationale for ensuring the Bill includes ‘cross-dressers’ under its definition of transgender identity:
‘A man who is not a trans woman but wears a dress for a drag performance, or a trip to the Rocky Horror Picture Show, or because he feels an emotional need to cross-dress occasionally is at high risk of transphobic hate crime and it is very likely that a perpetrator could later claim that they have no issue with "trans women who are really transitioning" and only had a problem with men dressing up as women without transitioning, so when they used the term "tranny" in the attack, they were only referring to transvestism / cross-dressing. The aggravation would not then apply if transvestism / cross-dressing is removed from the protection, because the prejudice was based on cross-dressing not on gender id
I don't really see how it is necessary myself.
Transgender people are subject to an increasing number of hate crimes especially in the last few years. This might be down to improved reporting, of course. This data is from Scotland, though it's also increased in England and Wales. These are crimes aggravated by hatred.
The Law Commission and some women's charities don't think that adding sex to the list of protected characteristics is a good idea, though I don't really understand why. I hope they get on and do it. I completely understand why women are upset about this.