Insulation between my wall and Neighbour's new wall

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Hi,

I live in a semi-detached property and My garage was converted into a Two-Storey extension 20 years ago. And now my neighbor is converting his garage into a two-storey extension.

They are in the process of their new wall, the gap between my wall and theirs is 50 MM. Their builder is suggesting keeping insulation in between the walls which will help to avoid damp issues in the future. He is suggesting the following polystyrene board( https://materialsmarket.com/products/50mm-eps70-polystyrene-insulation-board-2400mm-x-1200mm) as the material and will cover the gap in front/back by rendering. Also, block the gap at the top with some material.

My knowledge is limited in these and would like to know your opinion on the following question

1. Is insulation needed to avoid damp issues or this is optional?
2. if it is better to go with insulation, the above-mentioned material is the correct one or would u suggest a different one?

Thanks for your help in advance
 
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