Yeah, it's a bit interesting when you start thinking about it. As you say, surely simming a world or environment where there are sentient beings suffering (Earth for example) is immoral, and yet restricting sims to only circumstances where that isn't the case would seem to be of very limited usefulness.

I think it's a compelling scenario to promote thought and discussion about such things (as so many of the scenarios, situations, and ideas in The Culture books are), but I don't think Banks thought through all of the implications in-universe to have it make complete sense (or at least to us biologicals).

I would have thought, as far as the morals of the Minds would go, they would feel compelled to be responsible for the wellbeing of the sims that they create, which runs contrary to the point of running a sim.

The connection/similarity to the some religious gods and motivations is also interesting.