You could insulate the inside of the block wall. Either a short insulated framed wall in front of it, or more rigid foam. I'd guess the block wall wicks water from the ground, in which case I'd glue up 2" of rigid foam to the inside. Then glue drywall over that. That would also take away the least amount of floor space while insulating, and no thermal bridges.
You could cap off that short wall with a sill of sorts running around the inside. You could use it as a small shelf. The glued foam/drywall wouldn't support the sill, so you'd need to run short blocking, nailed to the studs just above the sill plate, cantilevered 2.5" or so outward. Then you could nail a sill trim piece over the cantilevered horizontal plane, and run the drywall up along the vertical end-grain of the blocking, possibly with a small piece of trim at the intersection of the drywall and a slight overhang of the sill. That would look nice.. hopefully that description isn't too hard to decipher!
A short framed wall would support a sill on its own.. though you'd still want to anchor that wall somehow, not sure if the ends of the studs would provide enough surface area for gluing to be sufficient. Plus that wood & insulation is in contact with the wicking block wall, so you'd want PT wood and probably mineral wool or rigid foam would be the only insulation I'd put in those damp cavities. Maybe you could attach a vapor barrier between the block wall and the short framed wall, though if it leaks you could have problems..
Just throwing ideas at you
You probably want to insulate that block wall though, it is a good heat conductor.