Abstract Podocyte dysfunction represents both an early pathological hallmark and a key driver of proteinuria in diabetic kidney disease (DKD); nevertheless, the potential epigenetic regulatory mechanisms remain poorly defined. Here, the histone methyltransferase SETDB2 is identified as a pivotal epigenetic suppressor of podocyte dysfunction and DKD progression. Glomerular SETDB2 expression exhibits a significant reduce in both DKD patients and mouse models, showing an inverse correlation with disease severity. Podocyte‐specific SETDB2 deficiency exacerbates podocytes dysfunction and accelerates DKD progression, whereas its overexpression exerts renal protective effects. Mechanistically, SETDB2 directly enhances H3K9 trimethylation at the Smad3 promoter, thereby repressing SMAD3 expression and activation, ultimately preserving podocyte function. Notably, it identifies TCF21, a transcription factor downregulated in DKD, as a direct upstream regulator of Setdb2 expression via binding to promoter and activating its transcription. Collectively, these findings establish SETDB2 as a critical regulator of podocyte integrity and a promising therapeutic target for DKD.