This quest can be activated on The Nameless Isle. In Sallow Man's camp, inside of War Room, you can find a letter from which you can learn that Windego is still alive.
If you didn't find this letter in Arx then you can speak with a rat in Barracks.
The animal informs you that its mistress is imprisoned. If your Persuasion is high enough you can convince the rat that you want to help.
Go to Prison where you can come across two paladins guarding an entrance to the lower level. Speak with Paladin Sauer and convince him to let you in.
There, you can find another group of paladins led by Loremaster Olyvie.
Speak with her. You learn that she doesn't know what to do with Windego. You can get closer to Windego only when you get rid of Olyvie. You can convince her to leave the room or you can fight with her and her group of paladins.
After that you must remove a barrier that guards Windego. Interact with a mechanism located near the cage. In order to succeed, you must sacrifice 6 Source Points.
Windego is now free. Talk to her. You must now make a decision what you want to do with her.
Choice 1: Let her go.
A peaceful solution. You let Windego go. She will reward you with a skill book.
Reward: 38,800 experience points + Charm Voidwoken skill book
Choice 2: Kill Windego
You can decide to kill Windego. She shouldn't be a difficult enemy to beat.
Reward: 38,800 experience points