Pretend it's 2007 again, andyou must choose between two investment opportunities. One is a pool of U.S.-based mortgage-backed securities packaged by a huge Wall Street firm. The other is a fund with stakes in small, obscure, mostly privately held lending institutions around the world. These so-called microbanks make unsecured loans to people who earn less than $2 a day and lack anything resembling collateral.

I can guess which one most of you would have picked. And while we all know what happened to mortgage-backed securities since then, the microbank investment has returned a consistent 6% annually over the past three years. What's more, the loans those obscure little banks made (loans as small as $50 in some cases) have enabled entrepreneurs living in some of the world's least developed countries to start or expand small businesses and begin to pull themselves and their families out of pervasive poverty.

I know this because I invest in those microbanks, as do a growing number of pension funds, foundations and high-net-worth individuals. I am also an active participant in an emerging investment category called impact investing. Although it's barely on most investors' radar screens today-and despite the fact that some microbanks have been in the news recently for doing more harm than good in these developing countries-I still firmly believe that in the coming decade impact investing could fundamentally reshape how your clients "do well by doing good," how the planet's biggest problems get solved and how you bring value to wealthy investors.

MAKING AN IMPACT

Impact investing combines the often-opposed forces of capitalism and social justice to achieve two main goals:

* Solve the major social problems of our time, including global poverty, infant mortality, a lack of clean water, homelessness, substandard education and global warming; and

* Generate reasonable financial returns for the companies, organizations and investors addressing those issues.

Impact investors pursue these twin goals by making debt or equity investments in social enterprises-companies and groups that use market-based solutions, such as sustainable business models and profit motives, to address social and environmental issues. Social enterprises are nothing new, of course. Thousands of these small, privately held firms have sprouted up around the world. The most famous is Grameen Bank, a microlender whose founder Muhammad Yunus was awarded the Nobel Peace Prize in 2006.

Here's what is new: As more of these firms have achieved their initial social goals, they're looking to expand their operations and do more good for more people in more countries. Much like traditional small companies, they're looking to the capital markets to help fuel their growth. This could significantly affect traditional charity and philanthropy as well as socially conscious investors (and the advisors who serve them).

A BETTER WAY

Impact investing is a response to some of the shortcomings in existing methods for enacting positive social change. Take government aid. For decades, it has largely failed to create meaningful and lasting social good due to an often ineffective use of resources and endemic government corruption in many of the world's poorest nations.

And traditional charity, while important, doesn't have the scale to address the world's biggest social issues by itself. The scope of problems like the lack of clean drinking water (which affects 960 million people) and proper sanitation (2.5 billion people) is enormous, especially for organizations that must rely solely on donations and the goodwill of others to make a difference.

Within the investment arena, traditional socially responsible investment options, such as SRI funds, tend to focus on identifying and avoiding big companies with perceived negative business practices or products. More recently, ESG funds have sought to identify and invest in large companies demonstrating strong environmental, social or corporate governance characteristics. Both funds serve important missions. But they aren't designed to provide targeted support to the types of privately held firms developing innovative solutions to the world's social problems.

By contrast, the new breed of social enterprises circumvents the limitations of government aid and traditional philanthropy by allocating financial and intellectual capital directly to entrepreneurs motivated to solve their own problems. This model is rapidly gaining acceptance in the marketplace as more of the developed world sees the world's poor as deserving of our investment, not just our charity.

Affluent baby boomers are a key driver of change here. Boomers are regaining their sense of social activism now that they're older and have more time and financial resources. As they start to define their success beyond their bottom line, they're looking for new ways to use their resources to create sustainable good. In addition, mid-career professionals in their thirties, forties and fifties are getting off the corporate treadmill and using their experience to support socially driven for-profit businesses.