A composite, layered, thermal insulation and cladding system and method to construct a hygro thermal (HT) wrap. The external insulation system controls the passage of heat, air, liquid water, water vapor, and moisture permeability of the system with the change of the moisture content in some materials. The HT wrap comprises at a material mix applied in two layers, with or without additional surface treatments. The inventive method includes the material combinations and their fiber diameter or particle size in such a manner that the microstructure of HT wrap will provide pore space for retention of the initially added water, permit expansion of the freezing water (thereby improving freeze-thaw durability), provide the interruption in the crack propagation (because the brittle inorganic matrix of the binders is prone to cracking), and provide a degree of elasticity needed to accommodate movements caused by the polyurethane foam or other substrates.