Integrating generative AI tools such as ChatGPT and digital simulators into higher education represents a new frontier in promoting deeper, transferable student competencies, particularly within sustainability education. This manuscript presents a comparative study of two cohorts of undergraduate students engaged in sustainability-themed challenge-based learning (CBL), one using generative AI tools and the other relying on traditional digital research methods. The study aimed to understand how AI integration impacts sustainable competencies, transversal skills, and problem-solving abilities. Our findings reveal that while generative AI fosters creativity and ideation, it risks undermining critical thinking and deeper learning if not scaffolded by intentional pedagogical strategies. We argue that the role of educators is pivotal in orchestrating the use of AI to promote meaningful engagement rather than passive consumption. This paper contributes to the emerging discourse on pedagogical best practices for integrating AI in CBL and sustainability education, offering recommendations for optimizing learning outcomes.