Food by-products are waste produced during food production and processing that has a detrimental effect on the environment. To guarantee a sustainable and healthy diet for the world’s population, reducing food loss and waste is an important component that has to be adopted. These by-products are rich in bioactive compounds and have a potential nutritional value. To meet sustainable development goals, there is an increasing concern about the availability of sufficient amounts of nutrients containing protein with suitable quality to maintain health. Therefore, much focus is given to the recovery of proteins from food by-products. Over time, green enzyme hydrolysis (GEH) has emerged as a suitable form of extracting high-value proteins from food processing waste. Based on the principles of circular bioeconomy and valorization of waste, it is considered an eco-friendly and very effective method. Specified proteases and mild conditions are used explicitly for biohazard protein-rich by-products that hydrolyze it with their qualities kept intact, benefitting its nutrition and functionality. Owing to the moderate severity under which the process is carried out, environmental pollution would be minimal. The process offers advantages such as high selectivity, tremendous energy reductions, and minimized by-product production. Fish waste, dairy residues, plant-based origins, and meat residues left from meat processing are some of the common food by-products usually used effectively. Such findings represent the wider potential uses of hydrolysates in providing food fortification, nutraceuticals, and biopolymers in association with more sustainable food systems. Enzyme type, pH, and temperature optimization are the main factors critical for the efficiency of enzymatic hydrolysis. Further advances of enzyme engineering and bioprocessing have strongly improved the efficiency of protein recovery and functional properties. The use of GEH technology with various latest technologies like hydrolysis assisted with ultrasound or a combination with membrane separation can make the process more efficient and purified protein. These findings are discussed in the current article, which advances protocols on GEH for protein recovery from food by-products and elucidates the significance of the commercial and environmental utility thereof. Further study would focus on enzyme formulations and scale-up applications.