It's easy to get bogged down in discussions related to the internal minutia of the game space, but please remember, that that isn't what this discussion is about.
It's about the actions of the developers, above the game - which is a very real thing, and not fiction or fantasy.
If the developers made a game where you scored points for killing disabled people, well, yes, you could say that it's all fiction and none of it is real, and not to get upset over it, but that wouldn't be the point; it would be about the choices and behaviour of the developers, and the statement they are making, and selling to other (very much real) people, with the game... and generally, it would not be considered okay.
The issue being raised is that here we have a situation where Larian have arbitrarily stepped in to say: "This is a representation of a child, of a people whom we have depicted as sentient and intelligent, and who have language and society and culture. We are not allowing you to murder this representation."
They have created something just a few stones throws away that says: "Here, on the other hand, is a representation of a child, of a people whom we have depicted as sentient and intelligent, and who have language and society and culture. You can murder THESE children, and in fact it's encouraged, because they're [insert race here]"
This is an 'above game' decision that Larian have made, that creates the undertones of an 'above game' message being sent, whether intentional or not... and it's a steeply racist one, that the game passively encourages you to partake in. They could have depicted the monstrous races as sub-humanoid, as more dramatically monstrous, and as less worthy of moral concern. They didn't. They chose to depict them as fully sentient, fully intelligent, language-using, personable, culture-bearing entities. That matters, for how they then encourage you to treat them.
Yes, the game is not real, yes its fantasy.... If that is the defence, however, then we absolutely need to be allowed to murder with equality - either no children of races depicted as sentient and intelligent can be wantonly killed, or they all can. Don't discriminate at an above game level on this.
I don't think we can kill the Goblin children because they're GOBLINS. I think we can kill them because they're clearly already dangerous sociopathic killers themselves (or are just a tiny step away from being so), and represent a clear threat to the lives of the peaceable citizens of the land. The Goblin children in the game are obviously adolescents, already capable of wielding weapons and already demonstrating sadism and psychopathic tendencies. You notice we don't see any really small and helpless Goblin children, no Goblin toddlers, no Goblin babies. If any of THOSE were in the game, and we could kill them, then I'd agree with you.