Just for posterity, I'm going to try and justify what we're doing here ethically as well. Not by the law, because, technically, we're not within that by using this program.
First, the main issue is copyright. While the Zelda games and characters are the Intellectual Property of Nintendo, our use, while not 'fair use' under most legal systems, benefits us only in that we get to enjoy ourselves: we're not selling anything (i.e. not making any profit), and arguably, we're losing out by wasting our time.
Second, custom quests don't hurt Nintendo. I don't speak for absolutely everyone, but the majority of us here are Zelda fans (which is, of course, why we're here), and we'll take whatever Nintendo gives us, assuming we can pay for it. If we weren't going to buy one of Nintendo's games, we probably wouldn't even if ZC didn't exist. I guess the possibility does exist where you could decide not to buy a Zelda game because you have all of these quests here for free, but as far as I can tell, that's a very borderline case.
Taking myself as an example (because I don't know enough about anyone else here) I will admit that I choose not to buy games of Nintendo's big IPs often, but that is solely due to the price, not because ZC is an alternative.
In fact, arguably, we help Nintendo, by keeping the Legend of Zelda alive in at least our little niche community. Every major game that they release (including outside of Zelda) gets its own discussion topic in Gaming and Entertainment, for example. And people who play the quests on here keep their love of Zelda games kindled and tide us over until they release a new game.
In fact, I would even argue that we don't even count as an alternative to Nintendo's products anymore. The last official Zelda game that we could get close to in ZC is A Link Between Worlds, and the last one before that is the Minish Cap. That's two in the last 15 years.
That being said, the fact that the 1st and 2nd quests are here does probably hurt their sales of it on Virtual Console.
Anyway, those are my views. As tl;dr: We don't offer any of Nintendo's products, or equivalents (except for the 1st and 2nd quests), so we don't pose any real threat. To me, that's an ethical justification.