If your daughter is still Catholic but non-practicing, it may not be a good idea to encourage her to baptize your grandson in a non-Catholic church. While we cannot know with certainty beforehand what the consequences of that might be, one possible consequence might be that your daughter might consider that to be encouragement to leave the Church entirely and join the church where her child is baptized. If your daughter leaves the Church and decides to have your grandson baptized in a non-Catholic church and the baptism is valid (i.e., Trinitarian formula, water baptism), you may attend as a Christian witness.
If she does not decide to have him baptized, continue to keep them both in prayer that God will eventually lead them home. In your daughter’s case it can be hoped that your she honestly doesn’t understand her responsibility to have her son baptized. In your grandson’s case, God will not hold an innocent child responsible for not receiving baptism when the situation is not his fault.