By Kate Abnett

BRUSSELS (Reuters) -The European Union should further slash the number of companies subject to its environmental and corporate sustainability rules, the European Parliament member leading negotiations on the policies said on Thursday.

The European Commission proposed a "simplification omnibus" in February that it said would help European firms compete with foreign rivals by cutting back on sustainability reporting rules and obligations intended to root out abuses in their supply chains.

Those proposals did not go far enough, according to Swedish centre-right lawmaker Jörgen Warborn, who has drafted amendments to scale back the laws further to only cover companies with 3,000 employees or more and over 450 million euros ($521 million) in turnover.

The Commission proposal would exempt companies with fewer than 1,000 employees - already, cutting out more than 80% of the roughly 50,000 companies currently covered by the green reporting rules. The EU counts around 6,000 companies with more than 1,000 employees.

"Europe is falling behind the U.S. and China in the global race for competitiveness. I'm entering this process with a clear ambition: to cut costs for businesses and go further than the Commission on simplification," Warborn said in a statement on Thursday.

His draft proposal must be negotiated in the European Parliament where other lawmakers can propose their own amendments. The Parliament will agree the final changes with EU member countries in the coming months.

Warborn, a member of the centre-right European People's Party lawmaker group, is facing competing calls from some right-wing lawmakers to scrap the policies entirely, and Socialist and Green lawmakers vowing to preserve them.

French President Emmanuel Macron and German Chancellor Friedrich Merz have both demanded the EU scrap the supply chain law.

But the walk-back on ESG rules has met resistance from some investors and campaigners, who have warned it weakens corporate accountability and hurts the bloc's ability to attract more investments towards meeting climate goals.

Warborn said his proposed changes will not weaken Europe's sustainability standards, but rather free up resources that companies can instead invest in innovation.

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(Reporting by Kate Abnett; Editing by Joe Bavier)