Understanding the mechanisms underlying neural progenitor differentiation and neuronal fate specification is critical for the use of embryonic stem cells (ESCs) for regenerative medicine. Cortical interneurons are of particular interest for cell transplantation; however, only a limited subset of these neurons can be generated from ESCs. Here we uncover a pivotal role for Activin in regulating the differentiation and identity of telencephalic neural precursors derived from mouse and human ESCs. We show that Activin directly inhibits the mitogenic sonic hedgehog pathway in a Gli3-dependent manner while enhancing retinoic acid signalling, the pro-neurogenic pathway. In addition, we demonstrate that Activin provides telencephalic neural precursors with positional cues that specifically promote the acquisition of a calretinin interneuron fate by controlling the expression of genes that regulate cortical interneuron identity. This work demonstrates a novel means for regulating neuronal differentiation and specification of subtype identity.