Background: Phenolic compounds are food-derived bioactive compounds well-known for their antioxidant and anti-inflammatory properties. They are in the spotlight for the management of diabetes due to their positive effects on glucose homeostasis. Materials and methods: We have performed a literature review on the main topics related to the application of phenolic compounds as functional food ingredients. This includes extraction and purification from vegetable sources and agro-industrial by-products, encapsulation to improve their solubility and bioavailability, and preclinical and clinical evidence linking these compounds with anti-diabetic activity. Objectives: (1) provide an understanding of the role of phenolic compounds on diabetes; (2) identify green technologies for phenolic compounds extraction from agri-food by-products following a biorefinery scheme; (3) underline the relevance of encapsulation techniques using nanotechnology to improve their bioavailability; (4) discuss the therapeutic efficacy of polyphenols. Results: This review compiles recent relevant research on phenolic compounds extraction from renewable resources, their purification from agri-food by-products, and encapsulation strategies using eco-friendly processes. It also highlights the preclinical and clinical evidence on phenolic compounds’ antidiabetic activity, giving insight into their mechanisms of action. Conclusions: This review explores the latest advances in polyphenols and how their benefits in glucose homeostasis can be applied toward improving the health of patients with diabetes and related conditions.