By Kate Abnett

BRUSSELS (Reuters) - The European Commission on Wednesday proposed looser environmental and corporate sustainability rules for a large majority of businesses in Europe, responding to criticism that EU red tape hinders competitiveness with foreign rivals.

Businesses and Germany and France have demanded change. However, the move has dismayed environmental campaigners and some other EU governments including Spain and some investors had urged Brussels not to weaken the green rules.

EU member states and the European Parliament could still block the changes.

Here's what the Commission has proposed:

SUSTAINABILITY REPORTING

The EU's corporate sustainability reporting directive (CSRD) requires companies to disclose information about their environmental and social impact, to make this more transparent to investors and consumers.

The Commission proposals would:

- Exclude an estimated 80% of the companies initially covered by the rules, by only applying them to firms with more than 1,000 employees. The CSRD is currently designed to cover around 50,000 companies with more than 250 employees.

-Apply the same exemption to the EU's "taxonomy", which defines what can be considered climate-friendly investments, so that only companies with more than 1,000 employees will be required to report on their business's alignment with taxonomy criteria.

- Give small and medium companies the right to refuse to provide certain data, if a bigger company asks them for this data to aid the bigger company's CSRD compliance. CSRD is already in force for the biggest companies, some of which have begun to publish their first reports in 2025.

DUE DILIGENCE

The proposals would also scale back Europe's corporate sustainability due diligence directive (CSDDD), which from 2027 would start imposing obligations on companies to find and fix human rights and environmental issues in their supply chains.

The proposals would:

- Delay the deadline for the first companies due to report from mid-2027 to mid-2028.

- Require companies to apply the rules to their direct suppliers, but no longer to other subcontractors and suppliers further down their supply chains.

- Companies would also have to assess their supply chains once every five years, rather than every year.

- Oblige a company to suspend - replacing the current obligation to sever - a contract with a supplier that falls foul of the rules.

- Not change the scope of the rules, which cover more than 6,000 large firms with more than 1,000 employees and 450 million euros in turnover.

CARBON BORDER LEVY

From 2026, firms importing steel, cement and other goods into the EU will have to pay an EU carbon border fee (CBAM) on the imported emissions in their products.

The proposals would:

- Change the rules to exclude around 182,000 the 200,000 importers currently covered, on the grounds that they produce only 1% of emissions in the scheme.

- Do this by only applying CBAM to companies importing goods weighing more than 50 metric tons per year. The existing rules cover all imports of CBAM-covered goods with a value above 150 euros.

- Cut red tape around claiming a reduction in CBAM costs for goods imported from a country where manufacturers already pay a CO2 price. The Commission will from 2027 publish a calculation of annual average carbon prices in other countries, so companies don't have to make the calculation themselves.

WHAT'S NEXT

- Most of the changes must be negotiated and approved by a majority of lawmakers in the European Parliament and a reinforced majority of EU member countries.

(Reporting by Kate Abnett; editing by Richard Lough and Hugh Lawson)