Spinal cord injury creates an inflammatory microenvironment that regulates the capacity of transplanted human Neural Stem Cells (hNSC) to migrate, differentiate, and repair injury. Despite similarities in gene expression and markers detected by immunostaining, hNSC populations exhibit heterogeneous therapeutic potential. This heterogeneity derives in part from the epigenetic landscape in the hNSC genome, specifically methylation (5mC) and hydroxymethylation (5hmC) state, which may affect the response of transplanted hNSC in the injury microenvironment and thereby modulate repair capacity. We demonstrate a significant up-regulation of methylcytosine dioxygenase 2 gene (TET2) expression in undifferentiated hNSC derived from human embryonic stem cells (hES-NSC), and report that this is associated with hES-NSC competence for differentiation marker expression. TET2 protein catalyzes active demethylation and TET2 upregulation could be a signature of pluripotent exit, while shaping the epigenetic landscape in hES-NSC. We determine that the inflammatory environment overrides epigenetic programming in vitro and in vivo by directly modulating TET2 expression levels in hES-NSC to change cell fate. We also report the effect of cell fate and microenvironment on differential methylation 5mC/5hmC balance. Understanding how the activity of epigenetic modifiers changes within the transplantation niche in vivo is crucial for assessment of hES-NSC behavior for potential clinical applications.