NTA for being disturbed by this, but it is his to do with as he sees fit. You will have to decide if this is a dealbreaker, as it will certainly affect your marriage and the relationship you have with his sister, and he’ll have to accept your decision as well.

He will become a parent, or at least a father-like figure to this child. With him already so closely bound to his sister, there’s no avoiding this development.

I just see the whole siring of nephew/son as problematic; explaining that process to the child will be interesting, but the child explaining to his friends (and enemies) that his uncle is his father will haunt him through childhood, no matter how it came about.

Does SIL not have anyone else that might offer his seed for the cause?