A Valve employee familiar with the adult content policy has shared some details in response to developer complaints about seemingly arbitrary game bans on Steam.
https://twitter.com/thatJaneNg/status/1074133288199962625
For one, a new option has been added in the report menu for games: Report child exploitation. 
Any game that, regardless of the presence of sexual content, features "child exploitation" is not allowed. This means that loli content is effectively banned from Steam. Presumably, Xenosaga Ep. 1 uncut would've also been banned from Steam.
The Valve employee also comments that games with school-aged children will receive special scrutiny
The Valve employee further confirms the ban on child exploitation and comments on the Key to Home ban. She claims that the ban on "child exploitation" in games without sexual content is due to Washington state obscenity law, not Valve's own discretion.
@StarKitsune0 shared some additional screenshots from the conversation. These indicate that part of the issue with Key to Home may have been insufficient disclosure during content review, Thus the reason for its ban may as much a compliance issue as a legal one.
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