I'm so debating on answering this. I almost shouldn't...but...(this could be long)...
At age 16, she still needs to be parented. Giving her a choice about who she lives with and how she handles this isn't really that great an idea. It shouldn't be your burden either. Parents, especially after a divorce, tend to become less parents and more friends. Yeah, kids should have the opportunity to make their own mistakes and no, you shouldn't shelter them from hurt, pain, and consequences.
However, parents have to maintain veto power. It's not a dictatorship, but it is a democracy. Democratic parenting is tough to pull off. Usually parents are either drill seargants or hellicopters - authoritarian or passive - both equally ineffective.
She needs a place to live with people that send the message, "I want you here because here is the best place for you and I love you." Giving a kid free reign on where they live is sending a message like, "I don't really care where you are." Which can be misinterpreted as the latter OR, even worse, "I don't care about you."
Not saying that the parent DOESN'T care...just that they sort of send that message when they're not willing to set some limits. Okay, so sis abused this and showed really poor judgment and wound up pregnant. Now what?
All the cute little baby showers and adorable materinty clothes in the world won't make her mature enough to handle this. She's going to have to grow up FAST. She needs adult support and guidance right now, and should definitely find a stable place to do that. Regardless of whose home that is, the more people around to help out, the better. That BABY needs a home now. One place, not two or three.
What can you do? Print out material for the parents to read, for your sister to look at. Bring one of those stupid baby think it over dolls from home, take sis to a maternity ward, take her to a day care....if it's a big enough town - find info on teen mom support groups and play groups. She can attend those prenatally in most places. You don't have the power to change the people around you, but you can be supportive. Offer to go to parenting classes with her, if you have time. Go to the birthing classes with her, when the boy toy flakes out.
She needs tools and supports right now, a plan for her future and for the future of that child. Be a source of healthy and sound support whenever you can. Don't put her down for her mistake, she can only try to do whats right. It's too bad they decided against adoption - in my opinion - just because this kids liklihood of becoming a happy, successful adult aren't good. This baby is going to be born with the odds against em. Your sis will need a lot of help in trying to avoid screwing up this kid.
It's not your burden, and ultimately, you can choose to do nothing. But what people need to focus on is that there isn't a baby...there's a future adult inside that little girl. A taste of what's coming?
You don't fall in love automatically with these little crying, smelly things. Yeah, they have their moments. But the first few months you feel like a mommy machine, living on a 4 hour schedule, sleeping face down in the carpet, your fingers don't stop smelling like poop for 3 years. The throw up...all the time. Your boobs leak and ache, and if you nurse, you feel like a human pacifier at times. As they get older, it does get easier.
Then they learn to talk. And argue. And tantrum. And take their diapers off in the middle of the night even when you try duct tape which means that now there's shit smeared all over em, their sheets..and maybe yours because you moved em out of the crib too soon and they toddled their naked, poop crusted behinds into your bed because for some reason, yours was uncomfortable.
Do I LOVE my kids, hell yeah. Every smile, every time they rolled over, and now listening to them learn to read..is amazing. But she will feel guilty when they're with a sitter too much. She will know in her heart when she's screwing up as a mom and that guilt..mommy guilt..is the worst in the world. If she's not mature enough to make the right decisions regarding this baby..and without support she won't...she will not be happy and neither will the child.
Okay, quick disclaimer...to anyone that is the child of a teenage mom or was a teenage mom, I do know that it CAN work...just saying..that it's definitely not ideal, it's 10x harder...you get the point.
They don't tell you in the hospital how to deal when there's blood in the diaper (usually not a big deal, btw) or what to do when the kid seems to puke up every thing you put in em (also pretty normal - it's really not as much as it looks), etc. They don't tell you how much you'll worry.
Sis needs a dose of reality. Again, I love my kids, but getting a masters degree while working 2 jobs and spending 15 hours a week driving was NOTHING compared to parenthood. It's hard. It's rewarding and I wouldn't take it back for anything...but coping at 16. Dear lord no.
I painted a pretty bleak picture, and I may be focusing a bit more on the negative than the positive, but I just wanted to get out that it's truly the hardest job you ever do.
Good luck, I hope that this helped even a little bit. I also hope that whatever happens, it's the right thing.