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Hello Desmond !
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This usually means the problem is in the pod TLS trust chain, not basic connectivity.
Since kube-aad-proxy is failing with that error when reaching https://sts.windows.net/..., I think that the Arc agent pod is likely seeing a certificate chain that its container trust store does not recognize.
The fact that curl works from the Kubernetes node does not fully rule this out because the node and the container can have different trust stores and may even take different proxy/egress paths.
For Azure Arc enabled Kubernetes, sts.windows.net, login.microsoftonline.com, and login.windows.net are required outbound endpoints and Arc expects HTTPS with publicly verifiable certificates. In proxy environments, a trusted proxy certificate may need to be injected into Arc agent pods via proxy certificate configuration.
You can resolve this by bypassing TLS inspection for the required Arc/Microsoft identity endpoints or
configuring Arc with the correct proxy settings and trusted proxy CA certificate so the agent pods trust the inspected certificate chain.