Stem cell-derived islet cell therapy can effectively treat type 1 diabetes, but its efficacy is hindered by low oxygen supply post-transplantation, particularly in subcutaneous spaces and encapsulation devices, leading to cell dysfunction. The response to hypoxia and effective strategies to alleviate its detrimental effects remain poorly understood. Here, we show that β cells within stem cell-derived islets gradually undergo a decline in cell identity and metabolic function in hypoxia. This is linked to reduced expression of immediate early genes (EGR1, FOS, and JUN), which downregulates key β cell transcription factors. We further identified genes important for maintaining β cell fitness in hypoxia, with EDN3 as a potent player. Elevated EDN3 expression preserves β cell identity and function in hypoxia by modulating genes involved in β cell maturation, glucose sensing and regulation. These insights improve the understanding of hypoxia's impact on stem cell-derived islets, offering a potential intervention for clinical applications.