XPS or EPS against the sheathing followed by fibrous insulation or blown cellulose would create a tight wall. For the best results, seal all cracks and holes in the walls.

What is holding up the house?
A pony wall is normally a shorter than ceiling height non-weight bearing wall, typically used to divides space at floor level while keeping t open ast eye level it makes the smaller areas appear larger).

It wounds like you just have a decorative wall 'covering' that does not go full height, closer to wainscoting.

brickeyee, Pony wall is probably the wrong term, my apologies. I have a walkout basement. The foundation to either side of the door to walk outside is only about 4 feet high, above that is some gross wood paneling up to the ceiling. So the foundation is only half the height of the basement wall in that part of the basement. So I was wondering if I ripped the paneling off and removed the fiberglass, could I use XPS or EPS directly against the sheathing. I can see from the first response that I can do that.