Video games are one of the richest and most popular forms of human-computer interaction and, hence, their role is critical for our understanding of human behaviour and affect at a large scale. As artificial intelligence (AI) tools are gradually adopted by the game industry a series of ethical concerns arise. Such concerns, however, have so far not been extensively discussed in a video game context. Motivated by the lack of a comprehensive review of the ethics of AI as applied to games, we survey the current state of the art in this area and discuss ethical considerations of these systems from the holistic perspective of the affective loop. Through the components of this loop, we study the ethical challenges that AI faces in video game development. Elicitation highlights the ethical boundaries of artificially induced emotions; sensing showcases the trade-off between privacy and safe gaming spaces; and detection, as utilised during in-game adaptation, poses challenges to transparency and ownership. This paper calls for an open dialogue and action for the games of today and the virtual spaces of the future. By setting an appropriate framework we aim to protect users and to guide developers towards safer and better experiences for their customers.