Long non‐coding RNA (lncRNA) lnc‐ISG20 has been found aberrantly up‐regulated in the glomerular in the patients with diabetic nephropathy (DN). We aimed to elucidate the function and regulatory mechanism of lncRNA lnc‐ISG20 on DN‐induced renal fibrosis. Expression patterns of lnc‐ISG20 in kidney tissues of DN patients were determined by RT‐qPCR. Mouse models of DN were constructed, while MCs were cultured under normal glucose (NG)/high glucose (HG) conditions. The expression patterns of fibrosis marker proteins collagen IV, fibronectin and TGF‐β1 were measured with Western blot assay. In addition, the relationship among lnc‐ISG20, miR‐486‐5p, NFAT5 and AKT were analysed using dual‐luciferase reporter assay and RNA immunoprecipitation. The effect of lnc‐ISG20 and miR‐486/NFAT5/p‐AKT axis on DN‐associated renal fibrosis was also verified by means of rescue experiments. The expression levels of lnc‐ISG20 were increased in DN patients, DN mouse kidney tissues and HG‐treated MCs. Lnc‐ISG20 silencing alleviated HG‐induced fibrosis in MCs and delayed renal fibrosis in DN mice. Mechanistically, miR‐486‐5p was found to be a downstream miRNA of lnc‐ISG20, while miR‐486‐5p inhibited the expression of NFAT5 by binding to its 3'UTR. NFAT5 overexpression aggravated HG‐induced fibrosis by stimulating AKT phosphorylation. However, NFAT5 silencing reversed the promotion of in vitro and in vivo fibrosis caused by lnc‐ISG20 overexpression. Our collective findings indicate that lnc‐ISG20 promotes the renal fibrosis process in DN by activating AKT through the miR‐486‐5p/NFAT5 axis. High‐expression levels of lnc‐ISG20 may be a useful indicator for DN.