Immunological protection of transplanted stem cell-derived islet (SC-islet) cells is yet to be achieved without chronic immunosuppression or encapsulation. Existing genetic engineering approaches to produce immune-evasive SC-islet cells have so far shown variable results. Here, we show that targeting human leukocyte antigens (HLAs) and PD-L1 alone does not sufficiently protect SC-islet cells from xenograft (xeno)- or allograft (allo)-rejection. As an addition to these approaches, we genetically engineer SC-islet cells to secrete the cytokines interleukin-10 (IL-10), transforming growth factor β (TGF-β), and modified IL-2 such that they promote a tolerogenic local microenvironment by recruiting regulatory T cells (T) to the islet grafts. Cytokine-secreting human SC-β cells resist xeno-rejection and correct diabetes for up to 8 weeks post-transplantation in non-obese diabetic (NOD) mice. Thus, genetically engineering human embryonic SCs (hESCs) to induce a tolerogenic local microenvironment represents a promising approach to provide SC-islet cells as a cell replacement therapy for diabetes without the requirement for encapsulation or immunosuppression.