Domestic cooling demands in arid and hot climate regions, including Qatar, induce a significant challenge to reduce the area’s cooling energy consumption and carbon footprint, primarily due to the heavy reliance on electricity-intensive air conditioning systems. The inadequacy and inefficiency of conventional construction and insulation materials and their improper implementation further exacerbate this issue. Considering such challenges, this research comprehensively evaluates an unconventional and innovative solution recently proposed for this purpose: mycelium-based thermal insulation. Mycelium is the vegetative, thread-like structure of fungi, consisting of a network of branching hyphae that facilitate nutrient absorption and environmental interactions. This review paper analyses mycelium-based composites, focusing on their mechanical, physical, and chemical characterization. It also explores the potential of mycelium as a sustainable solution for indoor temperature regulation, particulate matter absorption, and bioremediation. Moreover, this review examines various available insulation materials and highlights the unique advantages offered by mycelium-based composites. As a result, the literature review indicates that mycelium exhibits exceptional thermal and acoustic insulation properties owing to its low thermal conductivity, favorable water absorption coefficient, porous structure, and considerable mechanical strength. This porous architecture facilitates efficient air purification, improving indoor air quality. Additionally, mycelium shows promise in actively degrading pollutants such as hydrocarbons, heavy metals, and pesticides in soil and water.