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The sheathing has rotted because there was not a sufficient drainage gap behind the stucco cladding
This basement is insulated on the exterior with rigid foam over dampproofing, with granular backfill and footing drains to facilitate drainage away from the foundation, a termite shield to protect from pests, and cellular PVC to protect the rigid foam.
This exterior insulated slab-on-grade monolithic grade beam foundation is protected from pests by termite shield at the sill plate, borate-treated framing, flashing at end of wall insulation, brick veneer over slab-edge insulation, and rock ground cover.