Low cell retention and engraftment after transplantation limit the successful application of stem cell therapy for AKI. Engineered microenvironments consisting of a hydrogel matrix and growth factors have been increasingly successful in controlling stem cell fate by mimicking native stem cell niche components. Here, we synthesized a bioactive hydrogel by immobilizing the C domain peptide of IGF-1 (IGF-1C) on chitosan, and we hypothesized that this hydrogel could provide a favorable niche for adipose-derived mesenchymal stem cells (ADSCs) and thereby enhance cell survival in an AKI model. In vitro studies demonstrated that compared with no hydrogel or chitosan hydrogel only, the chitosan–IGF-1C hydrogel increased cell viability through paracrine effects. In vivo, cotransplantation of the chitosan–IGF-1C hydrogel and ADSCs in ischemic kidneys ameliorated renal function, likely by the observed promotion of stem cell survival and angiogenesis, as visualized by bioluminescence imaging and attenuation of fibrosis. In conclusion, IGF-1C immobilized on a chitosan hydrogel provides an artificial microenvironment for ADSCs and may be a promising therapeutic approach for AKI.