Perhaps discussions about what your own child-rearing philosophy is as a couple have not taken place. Ask your husband how he is affected by the conflict between his sister and yourself. Invite him to share his ideas directly with you and be sensitive to establishing a safe space for expression of differences between you. An honest discussion about child-rearing differences may yield other ways of viewing the situation. Or perhaps your spouse will understand your reasons and accept your perspective.
Understanding leads to solutions instead of power struggles.
Let him know that it is not acceptable for him to put your children in a situation that causes you considerable discomfort and concern for any reason. Offer him identical consideration as a father. Get to the bottom of what this power struggle is about and agree to nip it in the bud. It takes both of you to work on having a healthy marriage, but only one to file for divorce. Relationships thrive on empathy, but deteriorate under ultimatums.