Applying novel approaches to assess the sustainable livelihood potentially contribute to learning and managing social-ecological systems. This research demonstrates the trajectory of sustainable livelihoods in the Three Rivers Headwater Region (TRHR) of Western China for a period of 2003 to 2017, utilizing a bespoke Sustainable Livelihood Index (SLI). Devised through a top-down data collation method, the SLI integrates comprehensive official statistics, encompassing socio-economic metrics alongside climatic and other environmental conditions. We employed spatial visualization and cold hotspot analysis to discern the spatio-temporal nuances of the SLI. Furthermore, the Obstacle Factor Analysis (OFA) was implemented to identify salient barriers impacting the SLI. Results indicated a steady rise in the SLI over the examined period, indicating progressive enhancements in the livelihood sustainability. However, marked disparities were observed across the TRHR counties, reflecting heterogeneity in socioeconomic progress and resource allocation. While Yushu county displayed commendable growth, Jiuzhi county stood out as a significant cold spot. Notably, natural and financial resources surfaced as paramount stresses to SLI progression, emphasizing the necessity for robust resource management and economic support. Key challenges, such as the grassland carrying pressure index, deteriorated grassland territories, and per capita disposable income were identified as critical obstacles to the sustainable livelihood of pastoral communities. These factors collectively influence economic viability, grassland resource stewardship, and human capital development, which are intertwined with local economic gains and future potentials. In nutshell, this study highlights the multifaceted challenges faced by the TRHR in charting sustainable livelihood pathways and champions recalibrated policies to protect natural assets, amplify economic support, reinforce human capital, and nurture regional synergies for sustainable evolution. The key insights suggest the pressing need for innovative, nature-based solutions that amplify regional-scale livelihood resilience, especially considering the challenges related to natural assets, financial support, and human capital development.